These numbers are so fantastic, so absolutely crazed, that the thought of ever paying them off boggles the mathematical senses. (I have surreal nightmares that as we haggle with the Chinese for another $500 billion dollar note to fund cap-and-trade, or another DMV-like national health care center, the USS Carl Vinson radios that it is broke and has no credit to buy supplies off Dubai, or its F-18s sit in rows on its deck, gathering brine for want of parts to take off).

“They” will pay

How many of those diabolical rich making $250,000 and above are there left to gouge to pay for this all? It simply doesn’t compute. One is left with the only possibility that we slash defense, or we will inflate our way out, since no foreign debtor will want to supply those staggering sums of cash.

Athens in the fourth century B.C. chose to mint “redheads”, silver coins with bronze cores that were quickly exposed once the patina around the coins’ imprinted busts wore off. Rome did the same thing, and by the fourth century AD simply flooded its provinces with money of little real value. Germany paid off its war debts to France in the 1920s, with deliberately inflated German marks. I lived in Greece during the oil-embargo hyperinflation of 1973, and remember buying individual eggs with three or four inked-in price figures crossed out, as the store-keeper kept upping the price each day. (And I remember farming in the early 1980s when full-strength Roundup herbicide seemed to go from $60 to $70 to $100 a gallon in a single year).

What, me worried?

I don’t think any one knows what is quite going on. I recently gave a lecture, and a Wall Street grandee afterwards approached the dais, asking me for advice (me, who could not even turn a profit growing raisins, and was a lousy peddler of family fruit for years at Farmers’ Markets), saying in effect something like the following: “Mr. Hanson—Consider: Real estate bad—not going to put money there when I’m not sure where the bottom is. Stocks worse—had I got out at New Year’s, I’d have thousands more than I do now. Cash pathetic—the interest doesn’t even cover what’s lost to inflation. So what’s left—the dole?”

I had no advice, of course, other than some vague warning that we are in a war against capital, sort of similar to what Sallust and Cicero claim that Catiline and his band of dissolute and broke aristocrats were planning, with his calls for cancellation of debts and redistribution of property.

Here are the possible exegeses.

(a) Clueless. Obama, the community organizer from Chicago with a mere two years plus in the Senate, is clueless. He has never run a business, never served as an executive, never done anything in matters of commerce other than speak and write and authorize spending bills as part of his government job. The result is that he listens to the last person he speaks with—and with dozens of advisors with dozens more agendas, we are seeing a herky-jerky, now this, now that, everything but the kitchen sink, sort of governance. This version of the President is a nice guy who wants to please everyone and will please no one.

(b) Not so clueless. Or Obama has a pretty certain, calculated European objective of high taxes, big-spending programs, utopian foreign policy initiatives, and a therapeutic sense of ensuring we are all going to be equal by result. In that sense, the recession was a godsend, since he has a brief window of about six months of fright and uncertainty to ram through programs that will last a lifetime, and whose expense will ensure a vast redistribution of income. His closest advisors are life-long government technocrats who are inured to spending others’ money and can use tax-free public appurtenances (salaries, perks, benefits, travel, etc.) to emulate the grand lifestyles of those they detest in corporations and on Wall Street. So we will get a new technocrati overseer class to replace the now disgraced masters of the universe on Wall Street. This manifestation of Obama is a hustler of the first order, and almost everything he says from FISA and earmarks to raising the ethical bar on appointments and limits on spending is, well, made up as he goes along, with the assurance that the media is still ga-ga.

(c) A Mean streak. Or there is not so much chaos or European utopianism at work as a sort of primeval dislike of capitalists and those who have access to money—an angry President Obama whose furor now and again peeks through (remember the clingers’ speech, the accidental middle finger scratches, and the Robespierre rhetoric). Never mind the hypocrisy involved, or the mega-fortunes at play in the rise of Obama’s candidacy. Instead concentrate on the effects, both direct and insidious, of his initiatives on capital of the near-do-well. This is a quadruple whammy:

1) Aggregate tax rates are going to approach 70% in some states, effectively destroying the idea that anyone from the lower classes can ever achieve wealth in a single lifetime, and pass some of it on to his children (increases in estate taxes will be next).

2) The pulverizing of the Dow (cf. Obama’s flippant talk of gyrations and advice to invest now at rock bottom prices, as if those who were wiped out have disposable cash to buy more stocks) means that the aggregate wealth in 401(k)s and stocks for millions—along with equity in homes— of the upper middle classes has effectively vanished. In some cases, the lawyer or contractor who a year ago had $400K put away in retirement funds and $300K in home equity has effectively lost half, if not more, of his hard-won wealth. And when one computes the additional taxes on future income he will pay, it will be almost impossible in his remaining lifetime to make it back.

3) The promises of free health and free education for everyone most surely will come with salary considerations and mean-testing (we are seeing that already with ideas floating about charitable contributions). In other words, the more you of the upper middle class will pay for new expansive entitlements, the more likely you will not be eligible to use the full extent of them.

4) The power of anti-“rich” rhetoric is already beginning to demonize the wealthy as those who have somehow done something wrong in paying the full ticket for their children’s’ educations, or their own health care, or their full mortgage payments. Of all the things that worry me about Obama, the most troublesome is his conflation of the super wealthy—who are so rich that even Obama cannot touch them and who often are his most fervent supporters—with the entrepreneurs, the scramblers of the small business class who make between, say, $250,000 and $600,000.

These already pay over 50% in various taxes, are eligible for almost no government support, do not have access to insider government breaks and special legislation, pay their own way—and create both jobs and new innovations critical to the performance of the U.S. economy. Yet between Wall Street and DC they have been targeted for extinction.

Target Limbaugh

Recently David Frum contrasted what he thought was the ungainly (both physically and morally) image of Rush Limbaugh with that of the suave Barack Obama to underscore how the Republicans must change and assume new leadership. I replied to that charge in a recent corner posting on nationalreview.com, and thought it was rather incoherent in that Limbaugh never claimed to be a national political leader and middle-way conservatives were simply following White House talking points.

Rumors also circulated that Rahm Emanuel, with Clinton emeriti, like Paul Begala and James Carville, are coordinating attacks on the talk show host from the White House. Now the New York Daily News prints a derivative hit piece by a senior correspondent David Saltonstall (note the melodramatic reference to Limbaugh’s four-part name) that has quips like:

“Rush Hudson Limbaugh 3rd, 58, is a thrice-divorced, formerly drug-addicted college dropout who casts himself as a working class hero, yet drives his $450,000 Mercedes-Benz Maybach 57S home to a 24,000-square-foot [1] Florida mansion every night (one of five houses on the property).”

Questions, however, arise. Do we really wish to go after the personal lives of entertainers and commentators, who are not in public office, as is true of say, a Bill Clinton, Larry Craig, or Ted Kennedy? Won’t this also open up a can-of-worms—such as ‘If Limbaugh abused prescription drugs, what about the President of the United States who admitted to using illicit drugs like marijuana and cocaine (“blow”)?’ Or “Is Limbaugh more honest for being rich and fiscally conservative or a John Kerry for being even richer and liberal”? Or “Is it worse for Limbaugh to use his own money to fly in his own jet, or for a Nancy Pelosi to use ours to fly in ours (and whose is the bigger anyway?).

Working-class hero?

I don’t recall Limbaugh ever saying he was a “working class hero” and worry more about how Connecticut Senator Chris Dodd got his various houses than I do the five homes of private citizen Rush Limbaugh. I think this invective all started because Limbaugh gave a speech to some conservatives and reiterated that he wished Obama’s socialist program initiatives to fail—from that point on, he morphed into the supposed lead target of the Obama hit team, that is rapidly becoming Nixonian in its attack on “enemies” like Hannity or Limbaugh. Wanting the Congress to say no on the President’s proposals for socialized medicine, in preference for refining the present system, is not the same as declaring America’s war in Iraq as lost (or hoping it so).

My take? If the multilateral White House insults the visiting British Prime Minister by a less than formal reception ceremony, and sends him packing with a gift box of CDs, and then pleads in its defense it is frazzled and overworked, what is it then doing spending hours to focus on and demonize a talk show host?

Bottom Line

I’ve come rapidly to the point where I simply do not believe (cf. the claim that all those companies every thirty minutes are going broke due to the lack of federal health care) that what our President says is at all accurate. And worse have come to think that he knows it is not, and, worse still, knows that the media largely know too but will do their part as disciples must. In short, we are soon to see an end to things as they once were for the last quarter-century.

I'll try to explain my view better... commerce is good (except for warheads to tyrants etc.), each transaction involves productive behavior between consenting adults and EACH transaction is a win-win situation for BOTH parties or they wouldn't make the deal. So each import is good and each export is good. More is better. To make a judgment about how they are going you should ADD them together for the trade figure instead of subtracting one from the other. You don't see growing imports in a contracting domestic economy or growing exports in a contracting global economy. In this bad economy, both imports and exports are way down. That is a more meaningful observation than comparing one with the other IMO.

Impressive statistic for Germany but not a fair comparison with the US economy IMO for the following reason: When Germany ships to any other country in European Union it is counted as an export, when someone in Florida, Texas, California, New York, Massachusetts or 45 other states ships across state lines it does not.

Doug,Thanks for the links. Very interesting. I wonder where drugs would be on the list of imports from Mexico if records were kept.Natural gas seems to be the biggest US export if I read the table correctly.I don't know how the oil market works. One wonders how we export so much oil rather than use it all here? It must not be that simple.

I'm not sure it's time to join the pitchfork and torch bearing throng. . . .

Terence Corcoran: AIG bonuses should be paidPosted: March 16, 2009, 7:47 PM by NP EditorTerence Corcoran, Barack Obama, compensation, AIGObama is punishing AIG for systemic failure created by government By Terence Corcoran

To use a current cliché, frequently deployed to humiliate bankers and CEOs: He doesn’t get it. Barack Obama, that is. He just doesn’t get it, and nor do millions of others who are following the U.S. President on his long destructive march against bankers and corporate executives for their alleged “recklessness and greed.”

Those were the words Mr. Obama used yesterday when he instructed his treasury secretary, Timothy Geithner, to “pursue every legal avenue” to block the payment of $165-million in bonuses to employees of AIG Financial Products. News of the payments sparked a demagogic explosion in Congress and the U.S. media, and the President seized the momentum and then got out in front of it. He loves a parade.

There’s no need to repeat here the distorted content and hysterical tone of the AIG explosion. What is worth repeating, however, are some of the facts behind the AIG bonus payments. Much has been made of AIG CEO Edward Liddy’s letter to Mr. Geithner, explaining the reasons for the bonuses. For people who like facts with their hysteria, and can calm down enough to read it, the Liddy letter appears elsewhere on this page.

Mr. Liddy had no involvement with establishing the original bonus plan, designed to “retain” AIG Financial Product specialists through 2008 and 2009. But he says he has “grave concerns about the long-term consequences of the actions we are taking” to reduce the contractual payments to AIG employees. He warns of AIG’s inability to retain the best talent. AIG, he says, will simply not be able to attract employees if they come to believe “that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.”

Now their compensation is about to undergo adjustment down to zero by the U.S. President. They say you can’t fight city hall. Then what can you do with the mighty U.S. government, which is going to throw the full legal force of the state against you? Even if the AIG employees are legally and rightly entitled to their bonus payments — which they almost certainly are — they are about to get steamrolled by a populist president riding an anti-corporate wave.

Of course, if you believe that AIG and its Financial Products group —through greed, recklessness and malfeasance — were the cause of AIG’s failure and the adjacent global financial meltdown, then you have no problem with rolling back the bonuses.

But the attack on executive compensation, Wall Street bonuses and bankers is largely without merit, a trumped up attack on the private sector — on markets and capitalism — to overshadow the real causes of the global financial crisis. In recent weeks, reports from U.S. Fed Chairman Ben Bernanke, the International Monetary Fund and former Fed Chairman Alan Greenspan added to the already mountainous body of evidence that massive government failure created a monetary- and policy-driven house of cards.

Writing in The Wall Street Journal last week, Mr. Greenspan all but conceded that the Fed missed the signals and implications from the flood of foreign-owned dollars cascading into the U.S. market — dollars that his monetary policies had created. But he said his 1% interest rate regime through 2003 and 2004 was not to blame.

Then Mr. Bernanke, current Fed chairman, in a speech last Tuesday, said we were experiencing the worst financial crisis since the 1930s, but, “Its fundamental causes remain in dispute.” While corporate behaviour may have played a role, Mr. Bernanke ran through a list of government-based causes for the global crisis. Mr. Bernanke cited global savings imbalances, the buildup of U.S. dollar currency reserves in China and elsewhere and the build-up of oil dollars among petroleum exporting countries.

The build-up of systemic risk — the rising odds that the entire system might crash — took place beyond the ability or even the responsibility of any one private bank or insurance company. No bankers or AIG executives are responsible for systemic risk.

The leading government-created disaster behind the financial crisis is U.S. housing policy and the multi-trillion dollar securitized mortgage market created by the U.S.-government backed mortgage agencies known as Fannie Mae and Freddie Mac. In comments in 2007, Mr. Bernanke reported that the two agencies, with $5.2-trillion in mortgage obligations, posed a systemic risk. Such risk, he said, occurs when “disruptions occurring in one firm or financial market may spread to other parts of the financial system, with possibly serious implications for the performance of the broader economy.”

When Fannie Mae and Freddie Mack failed, because of the mortgage bubble they helped create, the systemic meltdown spread around the globe. The private sector, bankers and insurance companies, were the victims of a failed global financial regulatory regime.

That conclusion is essentially the one delivered by International Monetary Fund officials in early March. In a brief report, “Initial Lessons of the Crisis,” the IMF reviews the regulatory disaster. It tries to put the blame on “market failure” and financial institutions for failing to recognize the looming systemic problems. But it is the regulators — who are really charged with detecting and preventing systemic risks — who failed to see the train coming down the track.

Botched regulations, distorting accounting rules, misguided monetary policy, over-stimulative government policy — the list of state policy failure behind the crisis is long and much more significant than any of the individual deals done by AIG Financial Products. They sold products that made sense under the monetary and regulatory regimes established by governments all over the world. Market players do that. Bankers are not responsible for systemic risk.

But now, apparently, bankers and financial market actors are supposed to personally pay for the government-created systemic risk and collapse. In its report, the IMF suggested that in future, financial market compensation packages should be designed so that individuals are only paid the money after the passage of time. “An early priority should be to delink bonuses from annual results and short-term indicators.” Instead, bonuses would be paid as “deferred disbursements and allowing for some claw back as risks are realized.”

Private market players, in other words, are to bear the burden of regulatory failure. They would only receive their compensation after they find out whether governments and regulators have done their jobs and protected against systemic risk. In AIG’s case, Mr. Obama is punishing AIG staff for massive, global government failure.

The AIG OutrageThe government shouldn’t run anything, because it cannot run anything.

By Larry Kudlow

This whole AIG fiasco — where the entire political class is suddenly screaming over bonuses paid to derivative traders in AIG’s financial-products division — is just a complete farce. What it really shows is how the government has completely bungled the AIG takeover. Blame the Bush administration and the Obama administration. It also shows, once again, why the government shouldn’t run anything, because it cannot run anything.

AIG should have been placed in bankruptcy last fall under some sort of government sponsorship. While in bankruptcy, all the salary contracts (and every other AIG contract) would have been nullified and voided. At the same time, there would have been an orderly liquidation and sale of AIG’s assets and separate divisions.

But as things stand now, there still is no clear roadmap for the dissolution of AIG. There are ideas, but nothing is set in concrete.

And as for the $165 million or so in AIG bonus payments, the Obama administration — including the president, Treasury man Tim Geithner, and economic adviser Larry Summers — knew all about them many months ago. They were undoubtedly informed of this during the White House transition.

So there’s no big surprise. Nobody should be shocked. But President Obama is doing his best play-acting ever. He knows full well that the nationwide outcry against federal bailouts and takeovers is only going to get worse on his watch. His poll numbers are already falling, and this AIG episode is going to pull them down more.

Incidentally, has anybody asked Team Obama why it is more than willing to break mortgage contracts with a bankruptcy-judge cram-down, but won’t cram-down compensation agreements for AIG, despite the fact that the U.S. government owns the company? Kind of odd, don’t you think?

The Wall Street Journal editors get it right when they ask: Who’s in charge and what’s the game plan? The whole AIG story is an outrage.

What’s more, AIG is acting as a conduit for taxpayer money that is being sent to dozens of derivative counterparties, including foreign banks and American banks like Goldman Sachs. If we’re going to bail out all these other firms, why not bail them out in full taxpayer view? Why is the money being laundered furtively through AIG? And where exactly is the end game for AIG? How are the taxpayers going to be repaid?

And what is Treasury man Geithner’s role in all this? He appears to be the biggest bungler in what has become a massive bungling. My CNBC friend and colleague Charlie Gasparino thinks Geithner can’t survive this. I am inclined to agree.

Nevertheless, behind the furor over AIG, there is some good news to report on the banking front. This week’s decision by the Federal Accounting Standards Board (FASB) to allow cash-flow accounting rather than distressed last-trade mark-to-market accounting will go a long way toward solving the banking and toxic-asset problem.

Many experts believe mortgage-backed securities and other toxic assets are being serviced in a timely cash-flow manner for at least 70 cents on the dollar. This is so important. Under mark-to-market, many of these assets were written down to 20 cents on the dollar, destroying bank profits and capital. But now banks can value these assets in economic terms based on positive cash flows, rather than in distressed markets that have virtually no meaning.

Actually, when the FASB rules are adopted in the next few weeks, it will be interesting to see if a pro forma re-estimate of the last year reveals that banks have been far more profitable and have much more capital than this crazy mark-to-market accounting would have us believe.

Sharp-eyed banking analyst Dick Bove has argued that most bank losses have been non-cash — i.e., mark-to-market write-downs. Take those fictitious write-downs away and you are left with a much healthier banking picture. This is huge in terms of solving the credit crisis.

In a column last week I suggested that not one more dime of government money is necessary for the banks. Instead, the marriage of the cash-flow valuation of bank assets and the upward-sloping Treasury yield curve will do the trick. Net interest margins are rising as banks purchase money for near-zero interest and loan it out at profitable rates. And the new mark-to-market reform will allow banks to hold their toxic assets for several more years and work them out — just as they did back in the 1990s.

We don’t need more TARP. We don’t need to take over more big banks. And we don’t need to have the government run things it simply isn’t capable of running.

CCP:" I wonder where drugs would be on the list of imports from Mexico if records were kept."

- Good point. Also it is said that if China paid full price royalties for the software, music and movies that it takes, that would entirely close the trade gap.

"One wonders how we export so much oil rather than use it all here? It must not be that simple."

- I don't know the mechanics either - shipping lanes or refined versus crude etc. We have a large geography. Reuters: "The biggest share of U.S. oil products exported went to Mexico, Canada, Chile, Singapore and Brazil", http://uk.reuters.com/article/oilRpt/idUKN0325640920080703?pageNumber=2&virtualBrandChannel=0Looks to me like refined product gets shipped out the west coast (no doubt that some of it originated in Canada, hence both import and export). I looks like the US east coast is a large importer, remember the Katrina refinery shutdowns in New Orleans (south coast?). I know Iran for example has no refining so they export oil but have to import all their gasoline. When Venezuela was threatening to cut off oil to the U.S, one analyst wrote that they would then have tankers going both directions through the Panama canal. It is a global market. Wouldn't it be easier to just switch the shipping labels.

At issue was the idea of insisting that millions of people make a transition from the dole to the work force. States were given much more power in running their federally-funded welfare programs, deadlines were imposed on individuals getting back to work, and a lifetime time limit of five years was set for family benefits.

Defenders of the status quo warned that more than a million additional children would be condemned to poverty. But what really happened was a 65% drop in welfare caseloads, millions liberated from the government teat and returned to supporting themselves, and a model gratefully followed by other countries.

Welfare reform proved the conservative Republicans right about the destructive wastefulness of government "helping" the have-nots by trapping them in a cycle of dependency. But it also proved that liberal Democrats, led by Bill Clinton, were capable of abandoning blind faith in the powers of government. Clinton was re-elected in great part thanks to his signing of welfare reform that year; the Republican architects of the law maintained a House majority for a decade afterward.

But today's Washington seems little impressed by the achievement of reducing the welfare rolls from over 5 million to below 2 million in the course of a decade. Congress' big-spending "recovery" package reverts the federal-states welfare funding arrangement to the old Aid to Families with Dependent Children (AFDC) system — in some respects making it worse than those bad old days.

"For the first time since 1996, the federal government would begin paying states bonuses to increase their welfare caseloads," noted Heritage Foundation scholars Robert Rector and Katherine Bradley in an analysis released last month.

"Indeed, the new welfare system created by the stimulus bills is actually worse than the old AFDC program because it rewards the states more heavily to increase their caseloads," they added. Under Congress' new scheme, "the federal government will pay 80% of cost for each new family that a state enrolls in welfare; this matching rate is far higher than it was under AFDC."

Rector and Bradley found that in the first year welfare spending will see its highest rise in history, an increase of more than 20% to exceed $600 billion. The overall cost over the next decade is estimated to reach $1.34 trillion.

In response to the argument that the magnitude of the current financial crisis and economic downturn mandates this welfare reversal, the Heritage analysts point out the existence of a quickly accessible $2 billion contingency fund for the states under welfare reform. Congress could easily have expanded that fund; instead, it chose to repeal reform.

Slate.com blogger Mickey Kaus is a liberal who is proud that Clinton and other Democrats embraced one of the most successful domestic reforms of recent decades. Last month, he reminded his readers that big labor interests view the workfare requirements of welfare reform as a threat to their members' inflated salary levels.

Kaus added, however, that the biggest-spending, Edelmanesque liberals "don't really need to be pressured into relaxing work requirements. They've never liked work requirements, including 'workfare,' and are always looking for an excuse to say 'It's OK to come back on the dole.' "On top of the return to welfare can be added the Obama administration's tax policies set to take a majority of Americans off the income-tax rolls — giving them no interest in lowering income-tax rates.

It all signals that this country may be taking a giant step toward a high-unemployment, low-growth European-style economy.

Story HighlightsNEW: Sen. Dodd tells CNN he put bonus provision in bill, despite earlier denialsSen. Chuck Grassley: Congress only has leverage if firm uses taxpayers' moneyAIG under fire for doling out big bonuses after taking bailout moneyRep. Barney Frank says execs shouldn't get bonuses if they are "incompetent"(CNN) -- Senate Banking committee Chairman Christopher Dodd told CNN Wednesday that he was responsible for language added to the federal stimulus bill to make sure that already-existing contracts for bonuses at companies receiving federal bailout money were honored.

Dodd acknowledged his role in the change after a Treasury Department official told CNN the administration pushed for the language.

Both Dodd and the official, who asked not to be named, said it was because administration officials were afraid the government would face numerous lawsuits without the new language.

Dodd, a Democrat, told CNN's Dana Bash and Wolf Blitzer that Obama administration officials pushed for the language to an amendment designed to limit bonuses and "golden parachutes" at those companies.

"The administration had expressed reservations," Dodd said. "They asked for modifications. The alternative was losing the amendment entirely."

On Tuesday, Dodd denied to CNN that he had anything to do with adding the language, which has been used by officials at bailed-out insurance giant AIG to justify paying millions of dollars in bonuses to executives after receiving federal money.

He said Wednesday that the "grandfather clause" language "seemed like innocent modifications" at the time. Watch Dodd's interview with CNN's Dana Bash »

Dodd said he did not speak to high-ranking administration officials and the change came after his staff spoke with staffers from Treasury.

The White House did not immediately respond to CNN's request for comment.

Later, in a town hall meeting in Costa Mesa, California, Obama addressed the AIG controversy, saying, "I'll take responsibilty. I'm the president.

"We didn't draft these contracts. But it is appropriate when you're in charge to make sure stuff doesn't happen like this," he said. "So we're going to do everything we can to fix it."

On Capitol Hill on Wednesday, AIG chief executive Edward Liddy called the roughly $165 million in bonuses "distasteful" but necessary because of legal obligations and competition.

"We have to continue managing our business as a business -- taking account of the cold realities of competition for customers, for revenues and for employees," Liddy told a House Financial Services subcommittee. "Because of this, and because of certain legal obligations, AIG has recently made a set of compensation payments, some of which I find distasteful."

Pennsylvania Rep. Paul Kanjorski, the hearing's chairman, responded to Liddy's statement by arguing that AIG should have refused to pay all the bonuses -- regardless of its contractual obligations with the bonus recipients.

"Let them sue us," said Kanjorski, a Democrat.

Liddy, who joined AIG after the bailout, said some employees have returned their bonus money.

Senators and representatives have vowed to get the bonus money back, but questions have arisen about why Congress didn't act to prevent the bonuses in the first place.

"Well, the only lever we have in this is the fact that these corporations have come to the Congress of the United States and want a taxpayers' bailout," Sen. Chuck Grassley, R-Iowa, said Wednesday on CNN's "American Morning."

"If it weren't for that, we would not have any leverage on how any individual corporation is being run, and we don't pretend to have any leverage on any corporation today in the United States that's not seeking federal help," said Grassley, the top Republican on the Senate Finance Committee. Related: Grassley defends 'suicide' comment

AIG, an ailing insurance giant, has received more than $170 billion in federal assistance. Taxpayers now own nearly 80 percent of the company.

In a letter to Congress on Tuesday, New York Attorney General Andrew Cuomo confirmed that AIG paid 73 employees bonuses of $1 million-plus each this year after it received federal bailout money.

AIG will have to return the $165 million it paid in executive bonuses to the Treasury Department, Treasury Secretary Timothy Geithner said Tuesday.

Grassley and Sen. Max Baucus, D-Montana, on Tuesday introduced a plan that would impose a hefty tax on retention bonuses paid to executives of companies that received federal bailout money or in which the United States has an equity interest. Watch Grassley describe how the tax would work »

Other lawmakers, such as Rep. Charlie Rangel, D-New York, said it would be unfair to use the tax code as punishment, but Grassley said it's not a question of being fair.

"It's unfair what they did to the taxpayers by paying bonuses when they don't have the money to pay bonuses," he said. iReport.com: Sound off on AIG

AIG Chairman and CEO Edward Liddy has defended the bonuses, saying the company needed them to retain top talent and because of contractual rights. He has pledged to reduce 2009 bonus payments, which AIG refers to as "retention payments," by at least 30 percent.

Libby is testifying Wednesday on Capitol Hill. He's likely to face tough questions from lawmakers despite not being at the helm of AIG when the financial fiasco happened. He took over about six months ago. Who's insured by AIG? »

Rep. Barney Frank, D-Massachusetts, said Wednesday that Congress can't just pass a law to abrogate any past contracts because that move would not hold up in court. Instead, he argued the executives don't deserve bonuses under the contract. Watch what Frank says about the bonuses »

"We own this company in effect, and we're not asking that these bonuses be rescinded because we have lent money to the company. I believe we are saying as the owners of the company, we do not think ... we should have paid bonuses to people who made mistakes who were incompetent," said Frank, chairman of the House Financial Services Committee. See facts, attitudes and analysis on the recession »CNN's Ed Hornick Kristi Keck contributed to this report.

Now Dodd blaming BO. We all know that is the end of Dodd. In few days watch for him tol come out apologizing or correcting what he just said as though it was "taken out of context" after the BO thugs and MSM go after him (and maybe his family). BO ain't going down for him that's for sure.I bet this whole thing doesn't hurt BO a bit. He is what the crats used to whine about Reagan - the "teflon" Prez.

****Dodd Blames Obama Administration for Bonus Amendment (Update2)

By Ryan J. Donmoyer

March 19 (Bloomberg) -- Senate Banking Committee Chairman Christopher Dodd said the Obama administration asked him to insert a provision in last month’s $787 billion economic- stimulus legislation that had the effect of authorizing American International Group Inc.’s bonuses.

Dodd, a Connecticut Democrat, said yesterday he agreed to modify restrictions on executive pay at companies receiving taxpayer assistance to exempt bonuses already agreed upon in contracts. He said he did so without realizing the change would benefit AIG, whose recent $165 million payment to employees has sparked a public furor.

Dodd said he had wanted to limit executive compensation at companies that got money from the government’s financial-rescue fund. AIG has received $173 billion in bailout money. His provision was changed as the stimulus legislation was negotiated between the House and Senate.

“I did not want to make any changes to my original Senate-passed amendment” to the stimulus bill, “but I did so at the request of administration officials, who gave us no indication that this was in any way related to AIG,” Dodd said in a statement released last night. “Let me be clear -- I was completely unaware of these AIG bonuses until I learned of them last week.” He didn’t name the administration officials who made the request.

No Insistence

An administration official said last night that representatives of President Barack Obama didn’t insist on the change, though they did contend that the language in Dodd’s amendment could be legally challenged because it would apply retroactively to bonus agreements. The official spoke on the condition of anonymity.

That provision in the stimulus bill may undercut complaints by congressional Democrats about the AIG bonuses because most of them voted for the legislation. No Republicans in the House and only three in the Senate supported the stimulus measure

“Taxpayers deserve better than this from their government, and this is just the latest reason why legislation must be transparent for all Americans to see before it is recklessly signed into law,” said Eric Cantor, the No. 2 Republican in the House.

The new law, approved by Congress Feb. 13 and signed into law by Obama the next week, effectively authorized bonus arrangements at companies receiving taxpayer bailouts as long as they were in place before Feb. 11. The AIG bonuses qualified under that provision.

Obama and many lawmakers who voted for the legislation, such as Senator Charles Schumer, a New York Democrat, and Senate Finance Committee Chairman Max Baucus, a Montana Democrat, are demanding AIG employees surrender their bonuses.

Schumer Letter

Schumer yesterday sent a letter to AIG Chief Executive Officer Edward Liddy warning him to return bonuses or face confiscatory taxes on them. The letter was signed by Senate Majority leader Harry Reid, a Nevada Democrat, and seven other senators.

Brian Fallon, a spokesman for Schumer, said the senator “supported a provision on the Senate floor that would have prevented these types of bonuses, but he was not on the conference committee that negotiated the final language.”

A House vote is planned for today on a bill to impose a 90 percent tax on executive bonuses paid by AIG and other companies getting more than $5 billion in federal bailout funds.

Republicans seized on the provision in the stimulus bill to paint Democrats as hypocrites.

“The fact is that the bill the president signed, which protected the AIG bonuses and others, was written behind closed doors by Democratic leaders of the House and Senate,” Iowa Senator Charles Grassley said in a statement.

AIG donated a total of $854,905 to political campaigns in 2008, according to the Center for Responsive Politics, a Washington-based research group. AIG employees as a group represent Dodd’s fourth-biggest donor during his career, the group’s research shows. The company’s political action committee, employees and immediate family members have given Dodd more than $280,000, the group said.

Dodd said the provision was written to give the Treasury Department enough discretion to reclaim bonuses as necessary.

“Fortunately, we wrote this amendment in a way that allows the Treasury Department to go back and review these bonus contracts and seek to recover the money for taxpayers,” he said.

Treasury Secretary Timothy Geithner told lawmakers in a letter this week that department lawyers believe it would be “legally difficult” to prevent AIG from paying bonuses.

Other Democrats who voted for the stimulus bill have ramped up criticism of AIG’s bonuses, including Massachusetts Representative Barney Frank, the chairman of the House Financial Services Committee, who told reporters, “I think the time has come to exercise our ownership rights.”

BTW, how much is the $180+billion we given to AIG? Well, if I have my numbers right, total take on Capital Gains is somewhere around $225B. Imagine what would have happened to the market if we had simply abolished the cap gains tax!

The International Monetary Fund is poised to embark on what analysts have described as "global quantitative easing" by printing billions of dollars worth of a global "super-currency" in an unprecedented new effort to address the economic crisis.

In case there was any residual doubt, the Bernanke Fed threw itself all in this week to unlock financial markets and spur the economy. With its announced plan to make a mammoth purchase of Treasury securities, the Fed essentially said that the considerable risks of future inflation and permanent damage to the Fed's political independence are details that can be put off, or cleaned up, at a later date. Whatever else people will say about his chairmanship, Ben Bernanke does not want deflation or Depression on his resume.

It's important to understand the historic nature of what the Fed is doing. In buying $300 billion worth of long-end Treasurys, it is directly monetizing U.S. government debt. This is what the Federal Reserve did during World War II to finance U.S. government borrowing, before the Fed broke the pattern in a very public spat with the Truman Administration during the Korean War. Now the Bernanke Fed is once again making itself a debt agent of the Treasury, using its balance sheet to finance Congressional spending.

CorbisWilliam McChesney Martin Jr.It is also monetizing U.S. debt indirectly with the huge expansion of its direct purchase program of mortgage-backed securities (MBS). It was $500 billion, and now it will add $750 billion more "this year." Foreign governments have been getting out of Fannie and Freddie MBSs in recent months and going into Treasurys. Thus the Fed is essentially substituting as these foreign governments finance U.S. debt by buying presumably safer Treasurys.

The purpose of these actions is to keep rates low on both Treasurys and MBSs, and to keep the cost of funds low for banks and especially for home buyers. It worked on Tuesday; long bond and mortgage rates fell.

The case for doing all this is that the Fed needs to supply dollars at a time when money velocity is low and the world demand for dollars is high amid the global recession. As long as the world keeps demanding dollars, the Fed can get away with this extraordinary credit creation. That said, bear in mind that the Fed's balance sheet has more than doubled since September -- to $1.9 trillion from $900 billion. These latest commitments mean it may more than double again, close to $4 trillion. That would be about 30% of GDP, up from about 7%.

The market reaction clearly showed the implied risks, with gold leaping and the dollar taking a dive the past two days. As the economy improves, and thus as the velocity of money increases, the risk of inflation will soar. Mr. Bernanke says the Fed can remove the money fast, but central bankers always say that and rarely do. The Fed statement isn't reassuring on that point. It says, "the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term." The Fed seems to be saying it wants a little inflation, which we know from history can easily become a big inflation or another asset bubble. The last time the Fed cut rates to very low levels to fight "deflation," we ended up with the housing bubble and mortgage mania.

The other great, and less appreciated, danger is political. The Bernanke Fed has now dropped even the pretense of independence and has made itself an agent of the Treasury, which means of politicians. With its many new credit facilities -- the TALF and the others -- it is making credit allocation decisions across the economy. If a business borrower qualifies for one of these facilities, it gets cheaper money. If it doesn't, it's out of luck. Thus the scramble by so many nonbanks to become bank holding companies, so they can tap the Fed's well of cheap credit.

The question is how the Fed will withdraw from all of this unchartered territory now that it has moved into it. How will it wean companies off easy credit, especially since some companies may need it to survive? What happens when Members of Congress lobby the Fed to keep credit loose for auto loans to help Detroit, or credit cards to help Amex? House Speaker Pelosi yesterday gave a taste, saying the AIG bailout was the Fed's idea "without any prior notification to us." Mr. Bernanke, meet your new partners.

Above all, the Treasury and Congress won't be happy if the Fed decides to stop buying Treasurys and the result is a big increase in government borrowing costs. This was the source of the dispute between the Federal Reserve and the Truman Treasury. The Fed wanted to raise rates amid rising inflation, while the Truman Treasury wanted cheap financing for Korea and its domestic priorities. The Fed prevailed in the famous "Accord" of 1951, thanks to a young assistant secretary of the Treasury named William McChesney Martin. He would go on to become Fed Chairman and create the modern era of Fed independence. The U.S. and the Fed are going to need another Martin, sooner rather than later.

Published: March 20 2009 19:39 | Last updated: March 20 2009 23:32Bankers on Wall Street and in Europe have struck back against moves by US lawmakers to slap punitive taxes on bonuses paid to high earners at bailed-out institutions.

Senior executives on both sides of the Atlantic on Friday warned of an exodus of talent from some of the biggest names in US finance, saying the “anti-American” measures smacked of “a McCarthy witch-hunt” that would send the country “back to the stone age”.

There were fears that the backlash triggered by AIG’s payment of $165m in bonuses to executives responsible for losses that forced a $170bn taxpayer-funded rescue would have devastating consequences for the largest banks.

“Finance is one of America’s great industries, and they’re destroying it,” said one banker at a firm that has accepted public money. “This happened out of haste and anger over AIG, but we’re not like AIG.”

Pandit memo to Citi employees on bonus clawbacks

Lockhart letter to Frank on Fannie/Freddie bonuses

The banker added: “It’s like a McCarthy witch-hunt?.?.?.?This is the most profoundly anti- American thing I’ve ever seen.”

Vikram Pandit, Citigroup’s chief executive, told employees in a memo that some anger about executive compensation was “warranted”. But he hit out against the idea of a special tax. “The work we have all done to try to stabilise the financial system and to get this economy moving again would be significantly set back if we lose our talented people because Congress imposes a special tax on financial services employees,” he wrote.

Some policymakers expressed concern that banks may try to break out of the government’s embrace by paying back public capital even if the price is a more severe credit squeeze.

They also fear that financial institutions may decide not to take part in public-private partnerships to finance credit markets and acquire toxic assets.

The outcry followed Thursday’s approval by the House of Representatives of a bill that would impose 90 per cent tax on bonuses to employees whose gross income exceeded $250,000 at bailed-out firms.

Next week the Senate will also consider a hefty tax on bail-out bonuses amid calls for an investigation into who was responsible for allowing the pay-outs. Some senators are calling for a committee hearing on a bill that would impose a 70 per cent tax at bailed-out institutions, half paid by employees and half by companies, arguing that a delay would help cool political anger.

“There are three big industries where the US has global leadership: financial services, media and technology. Introducing this 90 per cent tax is like taking one of those industries out the back and shooting it,” said a top Wall Street executive.

In Frankfurt one employee at a US investment bank said the new tax measures would “send [the US] back to the stone age”.

“Commodity traders are already moving to companies like BP where they can make as much money as they used to,” said another banker at a US firm.

Reporting by Lina Saigol in London, Julie MacIntosh and Saskia Scholtes in New York, Tom Braithwaite in Washington and James Wilson in Frankfurt

There is an old adage on Wall Street that no one rings a bell at major market tops or bottoms. That may be true in normal times, but as many have noticed, we are now completely through the looking glass. In this parallel reality, Ben Bernanke has just rung the loudest bell ever heard in the foreign exchange and government debt markets. Investors who ignore the clanging do so at their own peril. The bell’s reverberations will be felt by everyday Americans, whose lives are about to change in ways few can imagine. While nearly every facet of America’s economy has been devastated over the past six months, our national currency has thus far skipped through the carnage with nary a scratch. Ironically, the U.S dollar has been the beneficiary of the global economic crises which the United States set in motion. As a result, our economy has thus far been spared the full force of the storm.

This week the Federal Reserve finally made clear what should have been obvious for some time – the only weapon that the Fed is willing to use to fight the economic downturn is a continuing torrent of pure, undiluted, inflation. The announcement should be seen as a game changer that redirects the fury of the financial storm directly onto our shores.

In its statement, the Fed announced its intention to purchase an additional $1 trillion worth of U.S. treasury and agency debt. The purchases, of course, will be made with money created out of thin air through the Fed’s printing presses. Few can doubt that they will persist with these operations until the economy returns to its former health. Whether or not this can ever be accomplished with a printing press alone has never been seriously considered. Bernanke himself admits that we are in uncharted waters, with no map or compass, just simply a hope that more dollars are the answer.

Rather than solving our problems, more inflation will only add to the crisis. Falling asset prices, the credit crunch, declining consumer spending, bankruptcies, foreclosures, and layoffs are all part of the necessary rebalancing of our economy. These wrenching movements, however painful, are the market’s attempts to resolve the serious problems at the root of our bubble economy. Attempts to literally paper-over these problems will lead to disaster.

Now that the Fed has recklessly shown its hand, the mad dash to get out of Treasuries and dollars should not be far off. The more the Fed prints to buy bonds the less the dollar is worth. Holders of our debt (read China and Japan) understand this dynamic. We must expect that they will not only refuse to buy new bonds, but they will look to unload those bonds they already own.

Under normal circumstances, if creditors grew concerned that inflation was eating into their returns, the Fed would raise interest rates to entice them to buy. However, the Fed will avoid this course of action as it fears higher rates are too heavy a burden for our debt laden economy to bear. To maintain artificially low rates, the Fed will be forced to purchase trillions more debt then it expects as it becomes the only buyer in a seller’s market.

Just last week, Chinese premier Wen Jiabao voiced concern about his country’s massive investments in U.S. government debt. In the most unequivocal statement yet by the Chinese leadership on this issue, Wen made it plain that he was concerned with depreciation, not default. With his fears now officially confirmed by the Fed statement, we must wonder when the Chinese will finally change course.

There is a growing consensus that if China no longer wants to buy our bonds, we can simply print the money and buy them ourselves. This naïve view fails to consider the consequences implicit in such a change. When the Treasury sells bonds to China, no new dollars are printed. Instead, China prints yuan which it then uses to buy treasurers. This effectively allows America to export its inflation to China. However, now that we will be printing the money ourselves, the full inflationary impact will fall directly on us.

With such a policy in place, America has now become a banana republic. It won’t be too long before our living standards reflect our new status. Got Gold?

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read Peter Schiff’s book "Crash Proof: How to Profit from the Coming Economic Collapse".

Gov. Sanford gets it right too on a different facet of the clusterfcuk.

By MARK SANFORDColumbia, S.C.

America's states are laboratories of democracy. They are both affected by, and relevant to, the larger national debate. What we've found in our own corner of the country is that carrying a substantial debt load limits our options when it comes to running government.

A recent report by the American Legislative Exchange Council ranked us 47th worst in the nation for annual debt service as a percentage of tax revenue. Our state dedicates nearly 11% of its annual tax revenue to paying debt. On top of that, South Carolina has another $20 billion in unfunded, long-term political promises for pensions and other liabilities. The state budget has already been cut four times in recent months as the national economic downturn has impacted South Carolina and driven down tax revenue.

President Barack Obama recently signed a "stimulus" bill that will spend about $2 billion through "programmatic means" in South Carolina. In other words, the federal government will put this money directly into existing funding formulas and programs such as Medicaid. But there is an additional $700 million that I as governor have influence over, and it is the disposition of this money that has drawn the national spotlight to South Carolina.

Here's the background: Before the stimulus bill passed, I asked for states not to be bailed out. After it was signed into law, I said that a state bailout would create more problems than it solved, and that we shouldn't spend money we don't have. That debate was lost, so I looked for a reasonable middle ground. I asked the president for his support in using the $700 million to pay down state debt.

If we're going to spend money we don't have at the federal level, it becomes all the more important that our state balance sheet is in good order -- particularly if this is a protracted downturn. But many people do not realize that the stimulus money runs out in 24 months -- at which point South Carolina will be forced to find a new source of funding to sustain the new level of spending, or to make sharp cuts. Sure, I could kick the can down the road; in two years, I'll be safely out of office. But it would be irresponsible.

If South Carolina could use stimulus money to pay down debt, in two years we will be able to spend, cut taxes or invest even if the federal government can no longer provide more money -- not a remote possibility. In fact, paying debt related to education would free up over $162 million in debt service in the first two years and save roughly $125 million in interest payments over the next 13 years -- just as paying off a family's mortgage early frees up money for other uses.

When you're in a hole, the first order of business is stop digging. South Carolina is in a hole, and it's not a shallow one. Spending stimulus money on ongoing programs would mean 10% of our entire state budget would be paid for with one-time federal funds -- the largest recorded level in state history.

Also, spending stimulus money will delay needed state restructuring. General Motors recently found itself in a similar spot. It needs to be restructured if it is to prosper, but a federal bailout enabled it to put off hard decisions. Likewise, taking federal stimulus money will only postpone changes essential to South Carolina's prosperity. Though well-intended, it forestalls hard choices we must make.

One of Mr. Obama's central campaign themes was his pledge to do away with politics of the past. In his inaugural address, he proclaimed "an end to the petty grievances and false promises, the recriminations and worn-out dogmas, that for far too long have strangled our politics."

This idea connected with millions of voters, myself included. I've always believed ideas should rise and fall on their merits. In fact, I saw such historical significance in his candidacy and the change he spoke of that I published an op-ed on it before South Carolina's presidential primary last year. It was not an endorsement, but it did note the historic nature of his candidacy and the potential positive change in tone it represented. That potential may now be disappearing.

Last week I reached out to the president, asking for a federal waiver from restrictions on stimulus money. I got a most unusual response. Before I even received an acknowledgment of the request from the White House, I got word that the Democratic National Committee was launching campaign-style TV attack-ads against me for making it.

Is this the new brand of politics we were promised? Instead of engaging with me and other governors on the merits of our dissent, I am to be attacked in television ads? In the end, I just don't believe a problem created by too much debt will be solved by piling on more debt. This doesn't strike me as an unreasonable or extremist position.

Nevertheless, the White House declined my request for a waiver yesterday afternoon. That's unfortunate. But in coming months we'll continue advancing the debate at the state level about the merits of debt repayment. The fact remains that while we'd all like to spend unlimited dollars on the very real needs that exist in our state, we must spend in the context of what is sustainable.

Schiff hit the nail on the head regarding real estate bubble and gives an excellent explanation of why attention to the supply side of the economy comes first and demand follows. I disagree with him on the importance of some other points. You must certainly give credit to someone who wrote a book about collapse in such a timely manner but also be aware that books and warnings like these were available throughout the last 25 year expansion. The key is in the details of the analysis.

Schiff (from GM's interview link): "I saw this guy from Freddie Mac (and you know no one talks about this – it’s amazing this isn’t a front page story) – just recently last week(March 2007), they announced they were going to tighten their standards with respect to subprime mortgages that they buy. Going forward (it’s starting in a few months), they are not going to buy mortgages where there is a strong likelihood that the person can’t make the payment and it’s going to end in default. Now, that’s an amazing statement because it means up until that point they were buying those mortgages.

I like this quote, Schiff: "The problem is modern day (demand side) economists measure an economy just based on these GDP numbers, and if it is all consumption based on borrowing they don’t differentiate that. They don’t take a look at where the consumption is coming from, and they’ve confused the cart with the horse. The horse is savings and production; the cart is the consumption. You don’t drive an economy by consuming – the consumer is not the engine, the consumer is the caboose – but we’re acting like we’ve got this great economy simply because we consume, and the whole world owes because we’re doing it like we’re doing everybody a favor. It’s just nonsense."

OTOH, putting the focus on 'profiting' from the coming collapse instead of anticipating it, avoiding it, or surviving it reminds me a bit or Gilder picking stocks instead of just explaining trends. 'Profiting' sells better than just expanding your knowledge. My question would be how much better off are you to hold gold with $500 taken out of a strong economy and then own $1000 worth that you can convert back to a worthless currency for a collapsed economy. Seems to me you are screwed either way.

I don't agree that impending inflation was the trigger or the force that brought this down nor the trade deficit nor do I agree that it was the US bringing down the world; most measures indicate the downward force hit elsewhere first and hardest.

I still look for the best explanation of the collapse. The US economy is an amazing, dynamic machine that can withstand an amazing number of shocks and bad policies up to a point, but you can't forever keep chopping its roots and arms and legs off and still see it grow. A number of negative factors kept accumulating. The biggest 3 I see were real estate, energy and anti-growth tax and spend policies.

Like Schiff says in his book, "bubbles burst, don't they". Real estate values haven't made any sense for a long time. Zero equity with 100% borrowing, full deductability, teaser front end payments that expire with wildly exaggerated purchase prices led to a collapse accelerated by mark to market rules that combine good loans in with the defaulted ones.

Energy demand grew with the global economy. Supply here and elsewhere was curtailed. Prices rose until the weakest links in demand chain broke, crippling the economies.

Pelosi and the gang came with their promise of punishing all capitalist activity while opinion polls showed that they were here to stay and would be soon joined by an administration to her left, eager to crush capitalism. Eventually the rational and awake investors ran for cover while the rest of us watched our values implode.

The way out isn't complicated IMO: a) pro-growth fiscal policies (lower, simpler, flatter tax rates coupled with spending within our near-term means), b) commit to allow the private sector to produce as much energy as we expect to consume (at the forecasted 4% economic growth level), and c) real estate lending practices based on a meaningful down payment and a reasonable likelihood of paying back the loans.

The best news about the new Treasury bad bank asset purchase plan is that Secretary Timothy Geithner has finally settled on a strategy. The uncertainty was getting almost as toxic as those securities. Now all Mr. Geithner has to do is find private investors willing to "partner" with the feds (Congress!) to bid for those rotten assets, coax the banks to sell them at a loss, and hope that the economy doesn't keep falling lest taxpayers lose big on their new loan guarantees.

APOther than that, General, how was the siege of Moscow?

Markets nonetheless roared their approval yesterday, though also for the increase in existing home sales and for the Obama Administration's (belated) pushback against Congress's rage against bankers and private contracts. In simplest terms, Treasury is using loan guarantees and $100 billion in remaining TARP money to create a more liquid market for dodgy financial assets. These include those infamous mortgage securities, as well as various loans that may be nonperforming. The idea is to create new buyers for those assets, perhaps leading to higher prices than now exist in a illiquid market, and thus help banks gradually clean up their balance sheets.

This isn't the worst idea the federal government has ever had, and if it works it will help banks take their losses and burn down debt. A Resolution Trust Corp. would have been a simpler and more politically transparent way to do this, especially six months or a year ago. But this Administration and the entire bailout have already lost too much standing with the public to pull that off now. So in essence this is an attempt at a slow-motion bank workout without a fight over a new resolution agency or having to ask Congress for more money.

On the other hand, none of this will be easy to execute. Start with the problem of attracting private investors, who will have to accept Uncle Sam as a 50-50 business partner. Mr. Geithner says investors won't be subject to the same compensation limits as TARP recipients, but what happens if their asset purchases pay off in big profits? Will Congress settle for only half the upside -- especially as it faces epic deficits in the years ahead? Most likely, cries will go up that the buyers were allowed to underpay for the assets and thus make a killing.

Especially after last week, every investor has to ask whether the potential payoff is worth the risk of appearing in the future before a Congressional committee, saying "I do solemnly swear . . ." Maybe Treasury should also sell investors some Nancy Pelosi-political risk insurance.

Then there is the question of whether the banks will sell enough of those assets to make a difference. Mr. Geithner's bet is that the banks will judge that they are better off disposing of their bad assets, even if it means taking losses. With a cleaner balance sheet, they would then have an easier time raising more private capital and repaying their TARP money to Treasury more quickly. The stronger banks may well find this attractive, since they'd emerge faster from asset purgatory and get a competitive jump on the laggards.

The harder call is the weaker banks, such as Citigroup, which fear that taking big losses will weaken them further. Citigroup CEO Vikram Pandit has publicly said that he'd be violating his fiduciary duty to shareholders to take such losses when he thinks the market value of its assets is artificially low. Citi and Bank of America already have federal guarantees against tens of billions in future losses, so they have even less incentive than most to sell and write them down. Much will depend on how much Treasury can raise asset prices with this new liquidity play. Some banks -- some of them big -- will undoubtedly fail anyway.

Of course the largest risk, as always, is to the taxpayers. Don't be fooled because Treasury isn't going to Capitol Hill for more cash. The Obama Administration is instead leveraging the balance sheets of the Federal Reserve and Federal Deposit Insurance Corp., which will lend to the new public-private entities to buy the toxic assets.

In the case of the FDIC, it will lend at a debt-to-equity ratio of 6-to-l to the buyers. This means, according to the Treasury example, that the FDIC would guarantee 72 cents in funding for an asset purchased for 84 cents on the dollar. The feds and private investors would each put up six cents in capital. If the asset rises in value over time, the taxpayer and investors share the upside. If it falls further, then the taxpayers would absorb by far the biggest chunk of the losses. Better hope the recovery really is, as the White House says, just around the corner.

Whatever the Geithner plan's pitfalls, we sincerely hope this works. The feds have so thoroughly botched the TARP execution and various bailouts that Treasury has few options left. No accounting change can make bank losses vanish, or inspire investors and short sellers to value bank assets at more than their market price. Yes, banks need to earn their way out of trouble, and many are doing that, but they also need to burn losses. Might as well get on with it.

I disagree quite a bit with this piece, but post it anyway. It is glibly plausible-- how do we respond?

=====================

By ROBERT B. REICHTwenty-eight years ago, Ronald Reagan used the severe economic downturn of 1980-82 to implement an economic philosophy that not only gave force and meaning to a wide range of initiatives but also offered a way back to sustained economic growth. Is there a similarly powerful animating idea behind Obamanomics?

Chad CroweI believe there is -- and it's not a return to big government.

The expansive and expensive forays of the Treasury and the Federal Reserve Board into Wall Street notwithstanding, President Barack Obama's 10-year budget (whose projections may prove wildly optimistic if the economy fails to rebound by early next year) presents a remarkably conservative picture. In 10 years, taxes are expected to fall to around 19% of GDP, a lower level than the late 1990s. Spending is expected to drop to around 22.5% of GDP, about where it was under Ronald Reagan -- including nondefense discretionary spending at about 3.6% of GDP, its lowest since data on this were first collected in 1962.

The real distinction between Obamanomics and Reaganomics involves government's role in achieving growth and broad-based prosperity. The animating idea of Reaganomics was that the economy grows best from the top down. Lower taxes on the wealthy prompts them to work harder and invest more. When they do so, everyone benefits. Neither Reagan nor the apostles of supply-side economics explicitly promised that such benefits would "trickle down" to everyone else but this was broadly understood to be the justification.

Reaganomics surely marked the beginning of one of the longest bull markets in American history and generated enormous gains at the top. But its benefits were not widely shared. After the Reagan tax cuts, growth in the median wage slowed, adjusted for inflation. After George W. Bush's tax cuts in 2001 and 2003, the median wage dropped. Meanwhile, an increasing share of total income went to the top 1% of income earners. In 1980, before Reagan took office, the highest-paid 1% took home 9% of total national income. By 2007, before the economy melted down, the richest 1% was taking home 22%.

Obamanomics, by contrast, holds that an economy grows best from the bottom up. The president proposes to increase taxes on the highest 2% of income earners starting in 2011. Those tax increases will fund more Pell grants allowing lower-income children to attend college, better pay for teachers that show they're worth it, broader access to health care, improved infrastructure, and more basic research. These and related expenditures are designed to help Americans become more productive. You might think of it as "trickle up" economics.

The key is public investment. Reaganomics did not view any public spending as an investment in the future except when it came to spending on the military. Hence, since 1980, federal spending on education, job training, infrastructure and basic research and development (apart from defense-related R&D) have all shrunk as a proportion of GDP. And apart from a modest expansion of health insurance available to poor children, there has been no significant attempt to make health insurance broadly affordable to Americans.

Obamanomics is premised on the central importance of public investments in the productivity of Americans. The logic is straightforward. Capital no longer remains within the borders of a nation where it is saved. It moves to wherever around the globe it can get the best return. Some of it flows as highly liquid investments that slosh across borders at the slightest provocation, as we're witnessing in the current financial crisis. But much takes the form of direct investments in new plants and equipment, telecommunications systems, laboratories, offices and -- most important of all -- jobs. Such capital goes to nations that can deliver high returns either because labor is cheap and taxes and regulations low or because labor is highly productive: well educated, healthy and supported by modern infrastructure.

In this way, every nation faces an implicit choice of whether its strategic advantage will lie in low costs or high productivity. For the better part of the last three decades America's job strategy has tended toward the former. But this inevitably exerts downward pressure on the real wages of a larger and larger portion of our population.

Only those Americans whose parents can afford to give them a high-quality private education and health care, and who can situate themselves in locations with excellent infrastructures of telecommunication, transportation, public health and safety, have been able to link up with global capital on more positive terms. But not even they are entirely secure economically, because they face growing shortages of talented people they can rely on within easy reach, and can't entirely avoid the disadvantages of a deteriorating public infrastructure, such as ever more congested roads and airports.

Obamanomics recognizes that the only resource uniquely rooted in a national economy is its people -- their skills, insights, capacities to collaborate, and the transportation and communication systems that link them together. Public investment is the key to attracting long-term private investment so that a nation's people can prosper.

Bill Clinton understood this but failed to do much about America's deteriorating public investments because he came to office during an economic expansion, when the major worry was excessive government spending leading to inflation. Mr. Obama comes to office during the biggest downturn since the Great Depression, and his plan represents the largest commitment to public investment in 30 years.

Regulation, done correctly, is also a form of public investment because it enables consumers and investors to be confident about what they're receiving, and ensures that the side-effects of trades don't harm the public. Reaganomics assumed that deregulated markets always function better. They do in many respects. But when they don't, all hell can break loose, retarding economic growth.

Energy markets were deregulated and we wound up with Enron. Food and drug safety has been neglected, resulting in contaminated products that have endangered consumers and threatened whole industries. Financial markets were deregulated and we now have a global meltdown. Obamanomics, by contrast, views appropriate regulation as an essential precondition for sustainable growth.

Under Reaganomics, government was the problem. It can still be a problem. But a central tenet of Obamanomics is that there are even bigger problems out there which cannot be solved without government. By building the economy from the bottom up, enhancing public investment, and instituting reasonable regulation, Obamanomics marks a reversal of the economic philosophy that has dominated America since 1981.

Mr. Reich is professor of public policy at the University of California at Berkeley and a former U.S. Secretary of Labor under President Bill Clinton.

Zero Hedge is rarely speechless, but after receiving this email from a correlation desk trader, we simply had to hold a moment of silence for the phenomenal scam that continues unabated in the financial markets, and now has the full oversight and blessing of the U.S. government, which in turn keeps on duping U.S. taxpayers into believing everything is good.

I present the insider perspective of trader Lou (who wishes to remain anonymous) in its entirety:

AIG-FP accumulated thousands of trades over the years, all essentially consisted of selling default protection. This was done via a number of structures with really only one criteria - rated at least AA- (if it fit these criteria all OK - as far as I could tell credit assessment was completely outsourced to the rating agencies).

Main products they took on were always levered credit risk, credit-linked notes (collateral and CDS both had to be at least AA-, no joint probability stuff) and AAA or super senior portfolio swaps. Portfolio swaps were either corporate synthetic CDO or asset backed, effectively sub-prime wraps (as per news stories regarding GS and DB).

Credit linked notes are done through single-name CDS desks and a cash desk (for the note collateral) and the portfolio swaps are done through the correlation desk. These trades were done is almost every jurisdiction - wherever AIG had an office they had IB salespeople covering them.

Correlation desks just back their risk out via the single names desks - the correlation desk manages the delta/gamma according to their correlation model. So correlation desks carry model risk but very little market risk.

I was mostly involved in the corporate synthetic CDO side.

During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent - these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades - ever."

As these trades are unwound, the correlation desk needs to unwind the single name risk through the single name desks - effectively the AIG-FP unwinds caused massive single name protection buying. This caused single name credit to massively underperform equities - run a chart from say last September to current of say S&P 500 and Itraxx - credit has underperformed massively. This is largely due to AIG-FP unwinds.

I can only guess/extrapolate what sort of PnL this put into the major global banks (both correlation and single names desks) during this period. Allowing for significant reserve release and trade PnL, I think for the big correlation players this could have easily been US$1-2bn per bank in this period.

For those to whom this is merely a lot of mumbo-jumbo, let me explain in layman's terms:

AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money-losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam.

In simple terms think of it as an auto dealer who knows that U.S. taxpayers will provide for an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories).

What this all means is that the statements by major banks, i.e. JP Morgan Chase (JPM), Citi (C), and BofA (BAC), regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner's (and thus the administration's) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.

For banks to proclaim their profitability in January and February is about as close to criminal hypocrisy as is possible. And again, the taxpayers fund this "one time profit", which causes a market rally, thus allowing the banks to promptly turn around and start selling more expensive equity (soon coming to a prospectus near you), also funded by taxpayers' money flows into the market. If the administration is truly aware of all these events (and if Zero Hedge knows about it, it is safe to say Tim Geithner also got the memo), then the potential fallout would be staggering once this information makes the light of day.

And the conspiracy thickens.

Thanks to an intrepid reader who pointed this out, a month ago ISDA published an amended close out protocol. This protocol would allow non-market close outs, i.e. CDS trade crosses that were not alligned with market bid/offers

The purpose of the Protocol is to permit parties to agree upfront that in the event of a counterparty default, they will use Close-Out Amount valuation methodology to value trades. Close-Out Amount valuation, which was introduced in the 2002 ISDA Master Agreement, differs from the Market Quotation approach in that it allows participants more flexibility in valuation where market quotations may be difficult to obtain.

Of course ISDA made it seems that it was doing a favor to industry participants, very likely dictating under the gun:

Industry participants observed the significant benefits of the Close-Out Amount approach following the default of Lehman Brothers. In launching the Close-Out Amount Protocol, ISDA is facilitating amendment of existing 1992 ISDA Master Agreements by replacing Market Quotation and, if elected, Loss with the Close-Out Amount approach.

"This is yet another example of ISDA helping the industry to coalesce around more efficient and effective practices, while maintaining flexibility," said Robert Pickel, Executive Director and Chief Executive Officer, ISDA. "The Protocol permits parties to value trades in the way that is most appropriate, which greatly enhances smooth functioning of the market in testing circumstances."

And, lo and behold, on the list of adhering parties, AIG takes front and center stage (together with several other parties that probably deserve the microscope treatment).

So - in simple terms, ISDA, which is the only effective supervisor of the Over The Counter CDS market, is giving its blessing for trades to occur (cross) below where there is a realistic market bid, or higher than the offer. In traditional equity markets this is a highly illegal practice. ISDA is allowing retrospective arbitrary trades to have occurred at whatever price any two parties agree on, so long as the very vague necessary and sufficient condition of "market quotations may be difficult to obtain" is met. As anyone who follows CDS trading knows, this can be extrapolated to virtually any specific single-name, index or structured product easily. In essence ISDA gave its blessing for below the radar fund transfers of questionable legality. The curious timing of this decision and the alleged abuse of CDS transaction marks by and among AIG and the big banks, is striking to say the least.

This wholesale manipulation of markets, investors and taxpayers, has gone on long enough.

Is this really such a bad thing? I kind of like the idea of having a standard based on a basket of currencies. As a Canadian it will not effect my country to move to a new standard other then offer more stability.

Russia and China are coordinating proposals on a new global currency that could replace the US dollar as a reserve currency to prevent a repeat of the global economic crisis, the Kremlin said on Monday."We have received proposals from our colleagues in China, detailed proposals," President Dmitry Medvedev's top economic adviser Arkady Dvorkovich said. "Our positions are very similar."We have similar positions on the development of the international financial architecture," he told reporters. http://www.breitbart.com/article.php?id=CNG.7e6cab4fec704a0fdd135ecdac00673b.9c1&show_article=1

Its a long read but gives the best explaination of whats going on...........

My Manhattan Project

I have been called the devil by strangers and "the Facilitator" by friends. It's not uncommon for people, when I tell them what I used to do, to ask if I feel guilty. I do, somewhat, and it nags at me. When I put it out of mind, it inevitably resurfaces, like a shipwreck at low tide. It's been eight years since I compiled a program, but the last one lived on, becoming the industry standard that seeded itself into every investment bank in the world.

I wrote the software that turned mortgages into bonds.

Because of the news, you probably know more about this than you ever wanted to. The packaging of heterogeneous home mortgages into uniform securities that can be accurately priced and exchanged has been singled out by many critics as one of the root causes of the mess we're in. I don't completely disagree. But in my view, and of course I'm inescapably biased, there's nothing inherently flawed about securitization. Done correctly and conservatively, it increases the efficiency with which banks can loan money and tailor risks to the needs of investors. Once upon a time, this seemed like a very good idea, and it might well again, provided banks don't resume writing mortgages to people who can't afford them. Here's one thing that's definitely true: The software proved to be more sophisticated than the people who used it, and that has caused the whole world a lot of problems.

Crafty: "I disagree quite a bit with this piece (Robert Reich compares obamanomics to Reagan's success)...how do we respond?" - It took me a few days to find the time, but I will answer him point by point. Reich's arguments are the same as Hillary's, same as Obama's, same as our Democrat Senators and probably the same as your local Democrats. It is worth taking the time to go through this slowly and learn their points whether you want to join them or refute them.

Reich uses a mixture of scattered truths, straw man arguments, deceptive statistics and then draws conclusions from them that don't logically follow. Take a look.

For some reason, liberals like to start a serious piece with a false first sentence:

"By ROBERT B. REICHTwenty-eight years ago, Ronald Reagan used the severe economic downturn of 1980-82 to implement an economic philosophy that not only gave force and meaning to a wide range of initiatives but also offered a way back to sustained economic growth. Is there a similarly powerful animating idea behind Obamanomics?"

- Reagan did not 'use' the economic downturn of 80-82 to implement his philosophy. The downturn was caused by congress approving but delaying and phasing in the tax cuts while the Fed did not correspondingly delay the tightening of money. The monetary and fiscal changes were intended to be simultaneous, not to squeeze the life out of the economy with tight money before stimulating new activity with across the board rate cuts. As far as timing was concerned, Reagan was ready to go in 1976; he was not dependent on a recession that was largely avoidable.

Reich: "it's [Obamanomics] not a return to big government ...President Barack Obama's 10-year budget ...presents a remarkably conservative picture. In 10 years, taxes are expected to fall to around 19% of GDP, a lower level than the late 1990s. Spending is expected to drop to around 22.5% of GDP, about where it was under Ronald Reagan..."

- Yes it is a return to big government. Big government programs are scheduled to increase and accelerate forever if they can find a way to do it. He downplays the growth in government by stating it only as a percentage of a false GDP projection. GDP will grow more like a damaged speedboat pulling a larger and larger anchor - national health, federalized K-12, free college, national pre-K, mandatory universal civil service, limiting and taxing energy use, removing the ability to pass on a business, etc. etc. These things don't accelerate growth.

Reich with the standard Democrat focus group tested, straw man argument:"The real distinction between Obamanomics and Reaganomics involves government's role in achieving growth and broad-based prosperity. The animating idea of Reaganomics was that the economy grows best from the top down. Lower taxes on the wealthy prompts them to work harder and invest more. When they do so, everyone benefits. Neither Reagan nor the apostles of supply-side economics explicitly promised that such benefits would "trickle down" to everyone else but this was broadly understood to be the justification."

- Only an opponent of supply side incentives says the strategy is "trickle down". For one thing, there is no up-down to the economy; it is a complex, ever-changing jigsaw puzzle of interconnected parts. Rate cuts unleash energy and creativity across the board. The owner of an airline or bank or boat builder does not benefit from a tax cut unless someone else flies, makes a deposit or buys a boat. You don't raise taxes on the rich, you raise taxes on the economy, hurting all its participants.

Reich follows with deceptive statistics to find fault in a remarkable 26 year economic expansion:"Reaganomics surely marked the beginning of one of the longest bull markets in American history and generated enormous gains at the top. But its benefits were not widely shared. After the Reagan tax cuts, growth in the median wage slowed, adjusted for inflation. After George W. Bush's tax cuts in 2001 and 2003, the median wage dropped.

- When you add 20 million jobs, even if every earner increases their earnings, statistically 'the median wage falls. How can that be? A university doesn't hire many more Deans and Department Heads when it grows. More likely it adds teaching assistants and research assistants. The company doesn't hire more CEOs but it might hire more entry level people in every department. Conversely, if we laid off all our lowest seniority, lowest skill, entry level workers - chopped off the lowest rung of the ladder (as Reich's minimum wage proposals are designed to do) - the median wage increases with every job lost. That is a very deceptive statistic. A better measure is total receipts to the Treasury. That is the financial interest that the feds have in the private sector anyway.

Reich continues with deceptive statistics, all the negative ones they could find:"Meanwhile, an increasing share of total income went to the top 1% of income earners. In 1980, before Reagan took office, the highest-paid 1% took home 9% of total national income. By 2007, before the economy melted down, the richest 1% was taking home 22%."

Like median statistics, top 1% stats are bait and switch also. You are not measuring the same people. Yesterday's rich could all hold and increase their wealth while the new rich achieve even more as they invent, innovate, produce and sell into a much larger and richer and more globalized economy. Comparing the best in the world 27 years apart is interesting but not telling. Disparity is a contrary indicator: it increases in times of rapid growth because the rich are more invested. And disparity fell during the collapse. Is that what we want more of or less of?

Another false characterization and invalid conclusion, Reich continues:"Obamanomics, by contrast, holds that an economy grows best from the bottom up. The president proposes to increase taxes on the highest 2% of income earners starting in 2011. Those tax increases will fund more Pell grants allowing lower-income children to attend college, better pay for teachers that show they're worth it, broader access to health care, improved infrastructure, and more basic research. These and related expenditures are designed to help Americans become more productive. You might think of it as "trickle up" economics."

- First, he is not lessening the power of the top, he is transferring it over to smarter and nicer people at the government. Second, taking from the 2% doesn't pay for what they said it would pay for - witness the $600-700 billion rosy scenario out-year deficit projections. When Hillary was frontrunner (same message) she was going to repeal George Bush's tax cuts for the wealthiest Americans (a sleight of hand because the cuts were across the board with the percentage cut getting larger as you go down the income spectrum) and she was going to 'use the money' to pay for health care, and then use it for education, and then use it again to buy down the deficit, depending on who she was talking to. The dirty little secret is that there is actually more money collected from the rich at the lower rates.

Deception continued: "The key is public investment. Reaganomics did not view any public spending as an investment in the future except when it came to spending on the military. Hence, since 1980, federal spending on education, job training, infrastructure and basic research and development (apart from defense-related R&D) have all shrunk as a proportion of GDP..."

Again he minimizes the social benefit of defeating the Soviet Union and minimizes the increases in social spending by only citing it as a percentage of rapidly moving target, GDP growth under Reagan. Why doesn't he cite social spending as a percentage of a fixed number like 1980 GDP. Then the chart would show phenomenal growth, if that's what we even want, more grow in out-of-control social spending.

To summarize his view, we can have policies that are exactly the opposite of pro-growth policies, experience all of the growth anyway, and somehow in fairy tale fashion the gains will be beautifully distributed across the interest groups and electoral base of the Democrat party.

Feel Like Getting Nasty?The G20 wants international regulation that will export their mistakes to the entire planet.

By Mark Steyn

During the Obama administration’s foray to London this last week, officials provided a special telephone number to journalists interested in discussing foreign-policy issues in an “on-the-record briefing call with Secretary of State Hillary Clinton and National Security Advisor Jim Jones.”

Unfortunately, as part of the curious run of bad luck currently afflicting our new Secretary of State, upon dialing the number the gentlemen of the press were greeted by a honey-voiced seductress, presumably not Secretary Clinton, offering them “phone sex” and seeking their credit-card number if they “feel like getting nasty.”

No, it’s not a White House April Fool’s gag. This was April 2nd.

Alas, what with the collapse of the newspaper industry and major metro dailies filing for bankruptcy every 20 minutes, sticking phone sex on your expense tab isn’t as easy as it once was. So many of these big-shot correspondents were forced to hang up, call the White House Press Office, get given the correct number, and listen to Hillary droning on about the NATO summit for half an hour. The deputy press secretary, Bill Burton, insisted that the White House handing out sex-line numbers was no big deal and only Fox News would make a fuss about “a corrected phone number.”

I’m not sure why the White House needed to correct it. It’s the perfect radio ad for the administration. Call 1-900-OBAMA and Timothy Geithner will demand your credit-card number and ask whether you feel like getting nasty, because he certainly does. He’ll be wearing a steel-tipped basque, and the squeals in the background will be an AIG executive or the former CEO of General Motors hanging upside down in the Treasury Department basement while he feels the firm lash of government “regulation” from Barney Frank and Mistress Pelosi.

Well, we all hate “the rich,” don’t we? Last week, David Paterson, the governor of New York, said that if he’d known his latest tax increase would persuade Rush Limbaugh to sell his Manhattan apartment and leave the city, he’d have raised taxes earlier. Ha-ha. Very funny. In New York City, as Mayor Bloomberg has pointed out, the wealthiest 1 percent contribute 50 percent of municipal revenue. How tiny a number of people does Governor Paterson have to drive out before it causes significant shortfalls in the public coffers?

On the other hand, the rich can only be driven out if they’ve got somewhere to be driven to. At the ludicrous G20 summit in London last week, the official communiqué crowed over a “clampdown” on tax havens — those British colonies in the Caribbean and a few other offshore pinpricks in the map. “The era of banking secrecy is over,” the G20 proclaimed.

Does anyone seriously think a Swiss bank account or a post office box in the Turks and Caicos are responsible for the global meltdown?

No, but the world’s governments have decided to focus on irrelevant scapegoats. In the current crisis, Japan, Germany, and Italy (plus Russia) are in net population decline that’s only going to accelerate in the years ahead. So, unlike the U.S., they can’t run up the national debt and stick it to their kids and grandkids, because they don’t have any kids and grandkids to stick it to. If New York is running out of rich people, Germany is running out of people, period. The Chinese and other buyers of Western debt know that. If you’re an investor and you’re not tracking GDP versus median age in the world’s major economies, you’re going to lose a lot of money.

If government has a role in this crisis, it ought to be to reverse the combination of unaffordable social programs and deathbed demographics that make a restoration of real GDP growth all but impossible in many European nations. But that would involve telling the citizenry unpleasant truths, and Continental politicians who wish to remain electorally viable aren’t willing to do that. President Sarkozy, the Times of London reported, “said that the summit provided a once-in-a-lifetime opportunity to give capitalism a conscience.” What he means by “a conscience” is a global regulatory regime that ensures there’s nowhere to move to. If you’re France, which has a sluggish, uncompetitive, protectionist, high-unemployment business environment whose best and brightest abandon the country in ever-greater droves, it obviously makes sense to force the entire planet to submit to the same growth-killing measures that have done wonders for your own economy. But it’s not good news for the rest of the world. The building blocks for a global regulatory regime and even a global central bank with an embryo global currency (the IMF and the enhanced role of “Special Drawing Rights”) are an ominous development.

Let it be said that in recent years in America, the United Kingdom, and certain other countries the “financial sector” grew too big. In The Atlantic, Simon Johnson points out that, between 1973 and 1985, it was responsible for about 16 percent of U.S. corporate profits. By this decade, it was up to 41 percent. That’s higher than healthy, but it wouldn’t have gotten anywhere near that high if government didn’t annex so much of your wealth — through everything from income tax to small-business regulation — that it’s become increasingly difficult to improve your lot by working hard, making stuff, and selling it. Instead, in order to fund a more comfortable retirement and much else, large numbers of people became “investors” — albeit not as the term is traditionally understood: Instead, you work for some company and they put some money on your behalf in some sort of account that somebody on the 12th floor pools together with all the others and gives to somebody else in New York to disperse among various corporations hither and yon. You’ve no idea what you’re “investing” in, but it keeps going up, so why do you care? That’s not like a 19th-century chappie saying he’s starting a rubber plantation in Malaya and, with the faster shipping routes out of Singapore, it may be worth your while owning 25 percent of it. Or a guy in 1929 barking “Buy this!” and “Sell that!” at his broker every morning. Instead, an exaggerated return on mediocre assets became accepted as a permanent feature of life.

It’s not, and it can never be. Especially given the long-term structural defects in many Western nations. A serious G20 summit would have seen France commit to the liberalization of its economy; Germany to serious natalist incentives; Britain to a reduction of the near-Soviet size of state spending in Scotland and Northern Ireland; and the United States to allowing its citizens to keep more of their hard-earned money and thus reduce both the dependency on ludicrous asset inflation as the only route to socio-economic improvement, and the risk of a Euro-style decline in birthrate caused by the unaffordability of kids.

Instead, the great powers are erecting a global regulatory regime to export their worst mistakes to the entire planet.

As they say on the State Department phone-sex line, it’s going to get nasty.

Finally, what of the claim not to raise taxes on anyone earning less than $250,000 a year? Even ignoring his large energy taxes, Mr. Obama must reconcile his arithmetic. Every dollar of debt he runs up means that future taxes must be $1 higher in present-value terms. Mr. Obama is going to leave a discounted present-value legacy of $6.5 trillion of additional future taxes, unless he dramatically cuts spending. (With interest the future tax hikes would be much larger later on.) Call it a stealth tax increase or ticking tax time-bomb.

What does $6.5 trillion of additional debt imply for the typical family? If spread evenly over all those paying income taxes (which under Mr. Obama's plan would shrink to a little over 50% of the population), every income-tax paying family would get a tax bill for $163,000. (In ten years, interest would bring the total to well over $200,000, if paid all at once. If paid annually over the succeeding ten years, the tax hike per year would average almost $26,000.) That's in addition to his explicit tax hikes. While the future tax time-bomb is pushed beyond Mr. Obama's budget horizon, and future presidents and Congresses will decide how it will be paid, it is likely to be paid by future income tax hikes as these are general fund deficits.

We can get a rough idea of who is likely to pay them by distributing this $6.5 trillion of future taxes according to the most recent distribution of income-tax burdens. We know the top 1% or 5% of income-taxpayers pay vastly disproportionate shares of taxes, and much larger shares than their shares of income. But it also turns out that Mr. Obama's massive additional debt implies a tax hike, if paid today, of well over $100,000 for people with incomes of $150,000, far below Mr. Obama's tax-hike cut-off of $250,000 (over $130,000 in ten years and over $16,000 a year if paid annually over the following ten years). In other words, a middle-aged two-career couple in New York or California could get a future tax bill as big as their mortgage.

While Mr. Obama's higher tax rates are economically harmful, some of his tax policies deserve wide support, e.g., permanently indexing the alternative minimum tax. Ditto some of the spending increases, including the extension of unemployment benefits, given the severe recession.

Neither a large deficit in a recession nor a small increase from the current modest level in the debt to GDP ratio is worrisome. And at a 50% debt-to-GDP ratio, with nominal GDP growing 4% (the CBO out-year forecast), deficits of 2% of GDP would not be increasing the debt burden relative to income.

But what is not just worrisome but dangerous are the growing trillion dollar deficits in the latter years of the Obama budget. These deficits are so large for a prosperous nation in peacetime -- three times safe levels -- that they would cause the debt burden to soar toward banana republic levels. That's a recipe for a permanent drag on growth and serious pressure on the Federal Reserve to inflate, not the new era of rising prosperity that Mr. Obama and his advisers foresee.

Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.

Bubbles have been frequent in economic history, and they occur in the laboratories of experimental economics under conditions which -- when first studied in the 1980s -- were considered so transparent that bubbles would not be observed.

We economists were wrong: Even when traders in an asset market know the value of the asset, bubbles form dependably. Bubbles can arise when some agents buy not on fundamental value, but on price trend or momentum. If momentum traders have more liquidity, they can sustain a bubble longer.

But what sparks bubbles? Why does one large asset bubble -- like our dot-com bubble -- do no damage to the financial system while another one leads to its collapse? Key characteristics of housing markets -- momentum trading, liquidity, price-tier movements, and high-margin purchases -- combine to provide a fairly complete, simple description of the housing bubble collapse, and how it engulfed the financial system and then the wider economy.

In just the past 40 years there were two other housing bubbles, with peaks in 1979 and 1989, but the largest one in U.S. history started in 1997, probably sparked by rising household income that began in 1992 combined with the elimination in 1997 of taxes on residential capital gains up to $500,000. Rising values in an asset market draw investor attention; the early stages of the housing bubble had this usual, self-reinforcing feature.

The 2001 recession might have ended the bubble, but the Federal Reserve decided to pursue an unusually expansionary monetary policy in order to counteract the downturn. When the Fed increased liquidity, money naturally flowed to the fastest expanding sector. Both the Clinton and Bush administrations aggressively pursued the goal of expanding homeownership, so credit standards eroded. Lenders and the investment banks that securitized mortgages used rising home prices to justify loans to buyers with limited assets and income. Rating agencies accepted the hypothesis of ever rising home values, gave large portions of each security issue an investment-grade rating, and investors gobbled them up.

But housing expenditures in the U.S. and most of the developed world have historically taken about 30% of household income. If housing prices more than double in a seven-year period without a commensurate increase in income, eventually something has to give. When subprime lending, the interest-only adjustable-rate mortgage (ARM), and the negative-equity option ARM were no longer able to sustain the flow of new buyers, the inevitable crash could no longer be delayed.

The price decline started in 2006. Then policies designed to promote the American dream instead produced a nightmare. Trillions of dollars of mortgages, written to buyers with slender equity, started a wave of delinquencies and defaults. Borrowers' losses were limited to their small down payments; hence, the lion's share of the losses was transmitted into the financial system and it collapsed.

During the 1976-79 and 1986-89 housing price bubbles, the effective federal-funds interest rate was rising while housing prices rose: The Federal Reserve, "leaning against the wind," helped mitigate the bubbles. In January 2001, however, after four years with average inflation-adjusted house price increases of 7.2% per year (about 6% above trend for the past 80 years), the Fed started to decrease the fed-funds rate. By December 2001, the rate had been reduced to its lowest level since 1962. In 2002 the average fed-funds rate was lower than in any year since the 1958 recession. In 2003 and 2004 the average fed-funds rates were lower than in any year since 1955 when the rate series began.

Monetary policy, mortgage finance, relaxed lending standards, and tax-free capital gains provided astonishing economic stimulus: Mortgage loan originations increased an average of 56% per year for three years -- from $1.05 trillion in 2000 to $3.95 trillion in 2003!

By the time the Federal Reserve began to slowly raise the fed-funds rate in May 2004, the Case-Shiller 20-city composite index had increased 15.4% during the previous 12 months. Yet the housing portion of the CPI for those same 12 months rose only 2.4%.

How could this happen? In 1983, the Bureau of Labor Statistics began to use rental equivalence for homeowner-occupied units instead of direct home-ownership costs. Between 1983 and 1996, the price-to-rental ratio increased from 19.0 to 20.2, so the change had little effect on measured inflation: The CPI underestimated inflation by about 0.1 percentage point per year during this period. Between 1999 and 2006, the price-to-rent ratio shot up from 20.8 to 32.3.

With home price increases out of the CPI and the price-to-rent ratio rapidly increasing, an important component of inflation remained outside the index. In 2004 alone, the price-rent ratio increased 12.3%. Inflation for that year was underestimated by 2.9 percentage points (since "owners' equivalent rent" is about 23% of the CPI). If home-ownership costs were included in the CPI, inflation would have been 6.2% instead of 3.3%.

With nominal interest rates around 6% and inflation around 6%, the real interest rate was near zero, so household borrowing took off. As measured by the Case-Shiller 10 city index, the accumulated inflation in home-ownership costs between January 1999 and June 2006 was 151%, but the CPI measured a mere 23% increase. As the Federal Reserve monitored inflation in the early part of this decade, home-price increases were no longer visible in the CPI, so the lax monetary policy continued. Even after the Fed began to slowly raise the fed-funds rate in May 2004, the average rate remained low and the bubble continued to inflate for two more years.

The unraveling of the bubble is in many ways the most fascinating part of the story, and the most painful reality we are now experiencing. The median price of existing homes had fallen from $230,000 in July to $217,300 in November 2006. By the beginning of 2007, in 17 of the 20 cities in the Case-Shiller index, prices were falling. Serious price declines had not yet begun, but the warning signs were there for alert observers.

Kate Kelly, writing in this newspaper (Dec. 14, 2007), tells the story of how Goldman Sachs avoided the fate of many of the other investment banks that packaged mortgages into securities. Goldman loaded up on the Markit ABX index of credit default swaps between early December 2006 and late February 2007, as their price dropped from 97.70 on Dec. 4 to under 64 by Feb. 27. But the market was not yet in free-fall: The insurance on AAA-rated parts of the mortgage-backed securities (MBS) remained inexpensive. By mid-summer 2007, concern spread to the AAA-rated tranches of MBS.

At the end of February 2007, the cost of $10 million of insurance on the AAA-rated portion of a mortgage-backed security was still only $68,000 plus a $9,000 annual premium. Housing-market conditions deteriorated further in the first half of 2007. Case-Shiller tiered price sequences in Los Angeles, San Francisco, San Diego and Miami all show serious declines by the summer of 2007. Prices in the low-price tier in San Francisco were down almost 13% from their peak by July 2007; in San Diego they were off 10% by July 2007. Startling developments began to unfold that month. Between July 9 and Aug. 3, 2007, the cost of insuring AAA MBS tranches went from $50,000 upfront plus a $9,000 annual premium for $10 million of insurance to over $900,000 upfront (plus the annual premium).

Once the cost of insuring new mortgage-backed securities skyrocketed, mortgage financing from MBS rapidly declined. Subprime originations plummeted from $160 billion in the third quarter of 2006 to $28 billion in the third quarter of 2007. Mortgage-backed security issuance fell comparably, from $483 billion in all of 2006 to only $30.7 billion in the third quarter of 2007. Other measures of new loan originations were falling at the same time. The liquidity that generated the housing market bubble was evaporating.

Trouble quickly spread from the cost of insuring mortgage-backed securities to problems with credit markets generally, as the spread between short-term U.S. Treasury debt and the LIBOR rate increased to 2.40% from 0.44% between Aug. 8 and Aug. 20, 2007. Since U.S. Treasury debt is generally considered secure, but a bank's loans to another bank carry some risk of default, the spread between these rates serves as an indicator of perceived risk in financial markets.

In one city after another, prices of homes in the low-price tier appreciated the most and then fell the most; prices in the high-priced tier appreciated least and fell the least. The price index graphs for Los Angeles, San Francisco, San Diego and Miami show that in all of these cities, prices in the low-price tier have fallen between 50% and 57%. Moreover, housing prices have continually declined in every market in the Case-Shiller index. According to First American CoreLogic, 10.5 million households had negative or near negative equity in December 2008. When housing prices turned down, many borrowers with low income and few assets other than their slender home equity faced foreclosure. The remaining losses had to be absorbed by the financial system. Consequently, the financial system has suffered a blow unlike anything since the Great Depression, and the source is the weak financial position of the people holding declining assets.

Earlier, during the downturn in the equities market between December 1999 and September 2002, approximately $10 trillion of equity was erased. But a measure of financial system performance, the Keefe, Bruyette, & Woods BKX index of financial firms, fell less than 6% during that period. In the current downturn, the value of residential real estate has fallen by approximately $3 trillion, but the BKX index has now fallen 75% from its peak of January 2007. The financial sector has been devastated in this crisis, whereas it was almost completely unaffected by the downturn in the equities market early in this decade.

How can one crash that wipes out $10 trillion in assets cause no damage to the financial system and another that causes $3 trillion in losses devastate the financial system?

In the equities-market downturn early in this decade, declining assets were held by institutional and individual investors that either owned the assets outright, or held only a small fraction on margin, so losses were absorbed by their owners. In the current crisis, declining housing assets were often, in effect, purchased between 90% and 100% on margin. In some of the cities hit hardest, borrowers who purchased in the low-price tier at the peak of the bubble have seen their home value decline 50% or more. Over the past 18 months as housing prices have fallen, millions of homes became worth less than the loans on them, huge losses have been transmitted to lending institutions, investment banks, investors in mortgage-backed securities, sellers of credit default swaps, and the insurer of last resort, the U.S. Treasury.

In an important paper in 1983, Ben Bernanke argued that during the Depression, severe damage to the financial system impeded its ability to perform its economic role of lending to households for durable goods consumption and to firms for production and trade. We are seeing this process playing out now as loan funds for automobile purchases have withered. Auto sales fell 41% between February 2008 and February 2009. Retail and labor markets too are now part of the collateral damage from the housing debacle. Housing peaked in early 2006. Losses from the mortgage market began to infect the financial system in 2006; asset prices in that sector began to decline at the end of 2006. Meanwhile, equities and the broader economy were performing well, but as the financial sector deteriorated, its problems blindsided the rest of the economy.

The events of the past 10 years have an eerie similarity to the period leading up to the Great Depression. Total mortgage debt outstanding increased from $9.35 billion in 1920 to $29.44 billion in 1929. In 1920, residential mortgage debt was 10.2% of household wealth; by 1929, it was 27.2% of household wealth.

The Great Depression has been attributed to excessive speculation on Wall Street, especially between the spring of 1927 and the fall of 1929. Had the difficulties of the banking system been caused by losses on brokers' loans for margin purchases in 1929, the results should have been felt in the banks immediately after the stock market crash. But the banking system did not show serious strains until the fall of 1930.

Bank earnings reached a record $729 million in 1929. Yet bank exposures to real estate were substantial; as the decline in real estate prices accelerated, foreclosures wiped out banks by the thousands. Had the mounting difficulties of the banks and the final collapse of the banking system in the "Bank Holiday" in March 1933 been caused by contraction of the money supply, as Milton Friedman and Anna Schwartz argued, then the massive injections of liquidity over the past 18 months should have averted the collapse of the financial market during this current crisis.

The causes of the Great Depression need more study, but the claims that losses on stock-market speculation and a monetary contraction caused the decline of the banking system both seem inadequate. It appears that both the Great Depression and the current crisis had their origins in excessive consumer debt -- especially mortgage debt -- that was transmitted into the financial sector during a sharp downturn.

What we've offered in our discussion of this crisis is the back story to Mr. Bernanke's analysis of the Depression. Why does one crash cause minimal damage to the financial system, so that the economy can pick itself up quickly, while another crash leaves a devastated financial sector in the wreckage? The hypothesis we propose is that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution, can be transmitted quickly and forcefully into the financial system. It appears that we're witnessing the second great consumer debt crash, the end of a massive consumption binge.

Free markets are part of our freedom. The current economic crisis is causing a few people to have second thoughts about the free-market system. People blame the free market for the crisis; some point to the fact that Nazi Germany was one of the first countries in Europe to restore employment and industrial production when it moved to an authoritarian regime.

The criticism is almost totally unfounded. We can see that citizens in orderly market economies (that excludes Russia) even during a crisis are better off economically than those in command economies during boom times.

The problem characteristic of a free-market downturn is a glut: too much of everything and everything is too cheap. That's not the kind of problem they had in Soviet Russia or Communist China. Germany restored its industry, but the average German didn't benefit from the expansion at all, since it all went to military production.

But more fundamentally, the criticism misses an important point. The value of a free market economy is not solely or even primarily in the prosperity it has been proven to provide. As we approach the Holiday of Freedom, we should take account of the inherent importance of the freedom it provides.

This aspect of a free-market economy has been emphasized by many commentators, not necessarily libertarians. Economist and Nobel-prize recipient Amartya Sen writes in his 1999 book, Development as Freedom, "As Adam Smith noted, freedom of exchange and transaction is itself part and parcel of the basic liberties people have reason to value... The freedom to exchange words, or goods, or gifts does not need defensive justification in terms of their favorable but distant effects; they are part of the way human beings in society live and interact with each other."

And as Britain leaned leftward in the 1940s, economist Friedrich Hayek wrote the work The Road to Serfdom warning "Who can seriously doubt that the power which a millionaire, who may be my employer, has over me is very much less than that which the smallest bureaucrat possesses who wields the coercive power of the state and on whose discretion it depends how I am allowed to live and work?"

There is good reason to believe that people think this way. One example found in economics books is the blacks in the American South. There is convincing evidence that the material standard of living of the blacks was higher under slavery than after emancipation, and this is hardly surprising. The white masters had good reason to look after the physical condition of their slaves, just as farmers today take good care of their tractors. But I haven't heard that any emancipated blacks longed for the good old days of slavery.

In fact, we have evidence from our own history as well. There is plenty of evidence from the Torah that the children of Israel enjoyed a higher material standard of living in Egypt than they did in the desert. In Egypt they lived in houses, in the desert only tents. In the desert they repeatedly refer to the varied diet they enjoyed in Egypt, where they "sat on the meat pot and ate bread to satisfaction," not to mention the fish and the vegetables. By contrast, they refer to the manna as "insubstantial food." Even so, we never find that they contemplated returning to subjection in Egypt in order to restore their standard of living, only at times when they thought they were in mortal danger.

Even if you consider this bit of amateur Scriptural commentary rather speculative, it is certainly significant that we celebrate Pessah as "the festival of freedom," and not "the festival of prosperity."

Clearly, economic freedom is not the only or even necessarily the most important freedom, and that it needs to be limited in various ways in order to have an orderly and prosperous society. It is also true that in a democracy laws themselves are to some extent an expression of our national freedom. However, any time we consider limiting economic liberty in order to achieve some other worthy social aim, we must take into account not only any possible economic loss but also the loss of this important liberty per se.This article can also be read at http://www.jpost.com /servlet/Satellite?cid=1238562950157&pagename=JPArticle%2FShowFull

The global financial crisis and collapse in the oil market have stalled vital investment in oil exploration and production and are likely soon to lead to a sharp spike in prices, an energy consultant and financier says.

Matt Simmons, founder of Houston-based investment bank Simmons & Co, argues the underlying rate of decline of the world's ageing oilfields is as much as 20 percent a year and only high levels of investment can reduce that to single digits.With credit tight and oil prices almost $100 a barrel below their highs last year, oil companies are unable to sustain previous levels of spending and the result is falling production, he said in an interview on Thursday."We are three, six, maybe nine months away from a price shock. We are not talking about three to five years away -- it will be much sooner," Simmons told Reuters in London."These prices now are dangerously low. The lower prices fall, the less oil will be produced and the greater the chance of an oil spike," he said.

Oil prices hit record highs of almost $150 per barrel last July but have tumbled since then as the global economic downturn has cut energy consumption by consumers and companies alike.Prices have rallied from lows below $35 a barrel in December to above $50 but remain well below what many oil companies and producing countries say they need to invest in new production.Simmons is a proponent of the "peak oil" theory, and has argued for years that world oil output is in irreversible decline because oil industry infrastructure is getting too old.He says the cost of rebuilding the oil industry is colossal: "The industry's asset base is beyond its original design life." Twilight in the Desert Simmons' 2005 best-seller "Twilight in the Desert, The Coming Saudi Oil Shock and the World Economy," argued oil output from the Middle East's biggest supplier was reaching an apex and would soon decline, ending forever the era of cheap oil.Saudi Arabian oil company Aramco and many other analysts strongly disagreed with that thesis, saying Simmons exaggerated the rate of decline of older oilfields.

Cambridge Energy Research Associates last year put the rate of decline of the world's oilfields at just 4-5 percent a year.But Simmons' concerns over the impact of the credit crisis and the dramatic fall in oil prices are shared by many other, more conservative bodies, including the International Energy Agency (IEA), which advises 28 industrialized nations.IEA Deputy Executive Director Richard Jones warned the oil market this week that so far as much as 2 million barrels per day (bpd) of new upstream capacity due to come on stream had been deferred for now due to lack of funds and low oil prices.The IEA is also worried recent cuts in oil production by the Organization of the Petroleum Exporting Countries in an attempt to bolster prices have left oil inventories dangerously low, leaving little room for maneuver when oil demand recovers.Simmons says many OPEC oil producers will find it difficult to bring output back to previous levels once prices recover."When you have an old oilfield whose flow is being maintained by extremely high levels of investment and you reduce production, you rarely if ever get back to where it was."Slideshow: Which Oil Nations Make Money? Because of this and natural declines in output, oil use may not need to rise much before production fails to meet demand."Unless oil demand falls by 10 or 15 percent per annum, which it is not going to do, then we don't need to wait for oil demand to come back before we have a supply crunch," he said."Within a few months, we are going to realize our visible inventories are really tight -- squeaky tight -- and what would really be inconvenient is to see a recovery in the economy."Copyright 2009 Reuters. Click for restrictions.

America is Being LootedTuesday, April 14, 2009, 9:20 am, by cmartensonAs cynical as I am, I just can’t keep up.

That sentence is a paraphrase of a quote by Lily Tomlin that reads, “No matter how cynical you become, it's never enough to keep up.”

I have long been a cynic of the bailouts and, unfortunately, I cannot detect even the slightest sliver of daylight between the prior and current administrations. The reason, I fear, is captured by this quote from Simon Johnson, the former Chief Economist at the IMF and current professor at MIT’s Sloan School of Management:

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

The unfortunate conclusion here is that our system and processes are fully “captured” by a tangled web of interests that serve themselves over everything else. Your future, my future, and our future is being systematically ruined by a self-interested group of insiders that can no longer distinguish between their good and the common good.

Here’s the latest string of outrages from this week.

First it is vitally important that not just the absence of conflict of interest be present when big money is involved in policy decisions, but also the appearance of conflict. Our system of money is based on confidence (after all it is a Ponzi scheme) and therefore it is vital that our checks and balances assure that the public good is not abused by a few at the expense of the many.

In order for the average person to pull hard on the yoke of life, straining to earn their daily wage, that wage has to be worth something. What is money “worth” if some of us have to work to exhaustion to obtain it while a very small minority can literally conjure trillions out of thin air and distribute it amongst themselves?

Money is a social contract, especially fiat money, and abusing the trust inherent to making that money system work is the gravest of all possible errors. I am not exaggerating here.

This week I found out that even as Lawrence Summers, in his role as President of Harvard University, was excoriating professor Cornell West for shirking is professorial duties by making a spoken-word audio CD, he was himself moonlighting for a hedge fund and various Wall Street banks earning millions. Here’s Frank Rich in the NYT:

Lawrence Summers, the president’s chief economic adviser, made $5.2 million in 2008 from a hedge fund, D. E. Shaw, for a one-day-a-week job. He also earned $2.7 million in speaking fees from the likes of Citigroup and Goldman Sachs.

Those institutions are not merely the beneficiaries of taxpayers’ bailouts since the crash. They also benefited during the boom from government favors: the Wall Street deregulation that both Summers and Robert Rubin, his mentor and predecessor as Treasury secretary, championed in the Clinton administration.

This goes well beyond “the appearance of” a conflict of interest. If Summers were a judge he’d have to recuse himself from the case. Nearly $8 million in a few years from Wall Street is a conflict of interest. A massive one.

However, if smoking guns are more your thing, then this next bit of information from the same article will be to your liking:

Summers had done consulting work for another hedge fund, Taconic Capital Advisors, from 2004 to 2006, while still president of Harvard. He tried — and, mercifully, failed — to install the co-founder of Taconic in the job of running the TARP bailouts.

Think of the judgment of a person long in the public eye who has apparently learned nothing from their past scrapes with public perception who attempts to install a past patron in a plumb post involving public money being distributed to private, already wealthy recipients.

Think of the character of a person who can rationalize the act of publicly excoriating a professor for doing something that they are secretly doing themselves, but on a much grander scale.

That person is Lawrence Summers, the man chosen by the Obama team to coordinate the bailout efforts.

Rahm Emanuel, the current white house chief of staff, comes similarly burdened:

…the banking industry recently paid Rahm Emanuel $16 million for about two years of work. That investment was recently paid back when, as President Obama's chief of staff, Emanuel led the January campaign to release another $350 billion in bank bailout funds.

But it goes deeper than that. Rahm Emanuel also took what I consider to be a lot of money serving on the board of Freddie Mac, a company that is certain to cost the taxpayers hundreds of billions of dollars.

Before its portfolio of bad loans helped trigger the current housing crisis, mortgage giant Freddie Mac was the focus of a major accounting scandal that led to a management shake-up, huge fines and scalding condemnation of passive directors by a top federal regulator.

One of those allegedly asleep-at-the-switch board members was Chicago's Rahm Emanuel—now chief of staff to President Barack Obama—who made at least $320,000 for a 14-month stint at Freddie Mac that required little effort.

Before Timothy Geithner (“Turbo Tax Timmy” as he’s called in some circles) was appointed to the Treasury position, his career and connections were explored in depth in an excellent article in Portfolio.com by Gary Weiss:

After the Bear deal, the Fed wound up with $30 billion in collateral, mostly in the form of subprime-mortgage securities. Even Paul Volcker, the former Fed chairman who served on the search committee that picked Geithner and who still holds him in high regard, has expressed queasiness about the way the deal was structured. In a speech to the Economic Club of New York, Volcker said the Fed took actions that “extend to the very edge of its lawful and implied powers, transcending certain long-embedded central-banking principles and practices.” Volcker later leavened this harsh assessment a bit, telling me that the Fed’s intervention “was a proper action, but it was extraordinary—something that’s never been done before, in terms of calling upon that emergency power. It tells you how seriously they took it.”

Still, misgivings about the deal are hard to ignore, no matter how catastrophic the consequences of not intervening might have been. It doesn’t help that the deal is teeming with connections that are sure to raise questions. Dimon is one of the three class-A directors of the board of the New York Fed, and its head is Stephen Friedman, a former Goldman Sachs chairman, who still sits on the investment bank’s board. The New York Fed’s board also includes Richard Fuld of Lehman Brothers, a firm that is another oft-rumored potential candidate for a bailout. Fuld is a class-B director, meaning that he is elected by member banks, astoundingly, to represent the public. (Friedman is also supposed to be looking out for you: He was “appointed by the board of governors to represent the public.”) Thus Geithner reports to a board that is composed of people who are not only under his purview but would also benefit from any potential bailouts. The structure of the New York Fed’s board bears more than a passing resemblance to that of the New York Stock Exchange in the bad old days, when member firms, regulated by the N.Y.S.E., were heavily represented on its board.

Even more intriguing is Geithner’s informal brain trust, loaded with Wall Street luminaries. Since coming to the Fed in November 2003—recruited by then-New York Fed chairman Pete Peterson, co-founder of the Blackstone Group—Geithner has learned the ways of the financial industry at the feet of some of its biggest legends. He was almost immediately taken under the wing of Gerald Corrigan, a gregarious former New York Fed chief who is now a managing director of Goldman Sachs. Corrigan describes his relationship with Geithner as close, and it has flourished since Geithner’s first days at the Fed. Another frequent adviser—“you don’t want those things to get too formal,” Corrigan notes—is also a preeminent banker, Merrill Lynch C.E.O. John Thain, a Goldman alumnus and former head of the N.Y.S.E. Over the years, Thain has often talked to Geithner—“sometimes I talk to him multiple times a day,”

Given this extensive set of interconnections, you might think that he’d be careful to project the right image when stepping into the Treasury role but instead he saw fit to place a Goldman Sachs insider in the position as his top aide last January (before anybody was paying too much attention to all this insider self-dealing):

WASHINGTON — Treasury Secretary Timothy Geithner picked a former Goldman Sachs lobbyist as a top aide Tuesday, the same day he announced rules aimed at reducing the role of lobbyists in agency decisions.

Mark Patterson will serve as Geithner's chief of staff at Treasury, which oversees the government's $700 billion financial bailout program. Goldman Sachs received $10 billion of that money.

Just a few months later in March, when questioned about the appearance of conflict of interest, Geithner bristled at the suggestion:

"I am just asking the questions," Waters said, "because the talk is...that this small group of decision makers at the center of it is Goldman Sachs and that's what's causing a lot of the distrust, because people are thinking or believing that Goldman Sachs, because of the connections, have had a lot to do with the decisions that are being made."

Geithner took umbrage.

"I think it's deeply unfair to the people who are part of these decisions to suggest that they were making judgments that in their view were not in the best interest of the American people," Geithner said.

Apparently Mr. Geithner found it completely confusing why anybody would see anything at all wrong with a regular revolving door between positions of extreme financial power over public money and the firms set to benefit from public money.

To me, that is a sure sign that someone is too deeply embedded, too deeply conflicted, too detached from reality to even know where to draw the line. Timothy apparently cannot distinguish between the “best interest of the American people” and Goldman Sachs raking in billions of undeserved public dollars. To him, those are one and the same thing and that's a major reason why I have grave doubts that the bailouts will succeed.

Now let’s cross into the surreal. One of the more grossly mismanaged companies on the face of the planet, the one that will cost taxpayers close to a trillion dollars when all is said and done, is Fannie Mae, the Government Sponsored Enterprise, or GSE. Last night (Monday, April 14th, 2009) this came across my newswire:

7:30 [FNM] Fannie Mae Chief Executive Herb Allison to run TARP: WSJ

So who is it, do you suppose, that picked the CEO of Fannie Mae to run TARP? Could it be Summers and Geithner and Emanuel?

You bet. That’s the vetting team.

As far as I am concerned the CEO of Fannie Mae should be defending himself in court, not running a massive wealth redistribution program.

Meanwhile, Goldman Sachs reported strong earnings yesterday much of them based on the fact that Goldman Sachs received full payout from side bets it had made with AIG on which it should not have been paid a single dime. Goldman Sachs is a business run by grown-ups and knew that making bets on the unregulated OTC derivatives market did not come with any public guarantee. Nonetheless, Goldman was immediately bailed out, in full, on these side-bets by the Treasury Department.

The funny thing is, Goldman Sachs actually did the prudent thing and hedged their side bets with AIG (presumably by shorting AIG stock…that way, if AIG failed to pay off their side bets the stock price of AIG would slide thereby covering some of the losses for Goldman Sachs). So they were already "made whole" on these losses by their hedging activity.

So you might wonder how is it that a company that is not in danger of failing and has strong earnings and has prudently covered (or hedged) its bets comes to receive tens of billions of dollars of public money anyway? How can this be? More importantly, what does this tell us about the prospects for the bailout?

Here’s where we simply need to return to the opening quote:

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

My cynicism stems from the fact that as I string together the dots comprising this entire bailout fiasco I can come to only one conclusion; our “public policy” is not being conducted in the interests of the people, by the people, and for the people.

Public policy appears to be in the grip of a very powerful and self-interested cabal that seemingly has no concern for the future or the health of this country and does not even see the need to be cautious enough to mask its efforts.

The fact that the bailout trajectory did not waver in the slightest while passing from the Bush to the Obama administrations indicates that the bailout is not a function of who’s in political power, it is a function of something else, of some other power.

I fear that Simon Johnson has nailed it; “[the] recovery will fail unless we break the financial oligarchy that is blocking essential reform.”

By continuing on our current path, using the same people who created the mess to clean up the mess, we are wasting time, we are wasting money and we are wasting opportunity. Worse, we are risking the very sort of public backlash that has been thankfully missing from our cultural landscape for a long, long time.

Now, if you’ll excuse me, I have to go jogging to see if I can catch up with my cynicism.

The U.S. and Europe were widely expected to clash at the G-20 summit in London last month over how to address the global financial crisis. Voila, in just two days the problem was solved with a joint promise to increase International Monetary Fund resources by $750 billion to a total of $1 trillion.

AFP/Getty ImagesThe U.S. portion of this new commitment is more than $140 billion. Yet Congress has debated neither the amount nor the proposed use of the funds. Instead, President Obama and his fellow leaders simply waved their hands, like a Star Trek captain, and said make it so.

Recall that the IMF was founded in 1944 when the world monetary system operated on a gold standard. The fund's job was to act as a lender of last resort when countries encountered balance-of-payments shortfalls. When the world went to a fiat-currency system, the fund's original role became obsolete. It is possible to argue that a modified version of the lender-of-last-resort remains important for the global financial system. But over the past 30 years the fund has increasingly strayed from that limited mission to become a vehicle for transferring wealth to poor-country governments. The London agreement further advances these foreign aid ambitions with no oversight from Congress.

Exhibit A is a $250 billion increase in "special drawing rights," or SDRs -- one third of the new resources. SDRs are homemade credit allocations printed by the fund and handed out to all members. They are redeemable for subsidized loans from hard-currency fund countries. Prior to last week, there were about $32 billion in SDRs. The fund's board had lobbied for 12 years to double that number. But because the loans cost taxpayers more than $300 million a year and because there are no minimum governance standards that must be met by borrowers, Congress refused to approve the expansion.

Now Mr. Obama has overruled Congress and blessed an SDR increase -- not twice the existing number, but eight times. As Juergen Stark, a member of the European Central Bank Executive Board, told the German daily Handelsblatt, "It was never examined whether there indeed is a global need for additional liquidity," adding that "one used to take a lot of time to check something like this." He also called it "helicopter money for the globe." If Mr. Stark keeps this up, his G-20 dining privileges will be revoked.

As to the other $500 billion, here is the G-20 communique: "We have agreed to increase the resources available to the IMF through immediate financing from members of $250 billion, subsequently incorporated into an expanded and more flexible New Arrangements to Borrow [NAB], increased by up to $500 billion, and to consider market borrowing if necessary."

Keep your eye on that "expanded and more flexible" lingo. Fund rules state clearly that money under NAB can only be used "to forestall or cope with an impairment of the international monetary system or to deal with an exceptional situation that poses a threat to the stability of that system." In other words, to draw on the NAB the IMF has to argue convincingly that there is systemic risk. Moreover, there is a clear view that the money should be repaid as the crisis passes.

But now the NAB will be "expanded and more flexible." This implies an intention to alter the restrictive nature of NAB lending so that the London commitments can be used at the discretion of the fund, without approval of the contributors. A fund spokesman told us that the idea of increasing flexibility is that "the NAB money becomes part of the general resources of the fund and if the managing director decides that the fund needs to step in somewhere, it can."

That would be nirvana to IMF employees who have been running low on money to lend but love to roam the world signing up new "clients." Borrowers would like it too, since they take the general resources of the fund at rock-bottom rates with no implied obligation ever to retire the loan.

You may wonder why the IMF simply doesn't ask for a quota increase to expand its resources. Probably because that requires 85% of member votes and can take years. By using the NAB, Treasury can simply attach the request to any spending bill, and that is apparently what we can expect. A U.S. Treasury official told us last week that "the current U.S. share of the NAB is about 20%, so consistent with that, our share of a NAB increase of $500 billion could be up to $100 billion."

The upshot for U.S. taxpayers is that neither the $40 billion-plus in new SDRs nor the $100 billion for the NAB will get much democratic scrutiny. Yet they amount to a massive expansion in U.S. foreign aid. We can see why the G-20 applauded. But this is the opposite of the "transparency" this Administration has promised, and someone on Capitol Hill should blow the whistle.

A 'Copper Standard' for the world's currency system? http://www.telegraph.co.uk/finance/comme... Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal. By Ambrose Evans-PritchardLast Updated: 12:33PM BST 16 Apr 2009

China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons. Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can. "China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years." "The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said. The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass). While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank. John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep." Zhou Xiaochuan, the central bank governor, piqued the interest of metal buffs last month by calling for a world currency modelled on the "Bancor", floated by John Maynard Keynes at Bretton Woods in 1944. The Bancor was to be anchored on 30 commodities - a broader base than the Gold Standard, which had caused so much grief in the 1930s. Mr Zhou said such a currency would prevent the sort of "credit-based" excess that has brought the global finance to its knees. If his thoughts reflect Communist Party thinking, it would explain the bizarre moves in commodity markets over recent weeks. Copper prices have surged 49pc this year to $4,925 a tonne despite estimates by the CRU copper group that world demand will fall 15pc to 20pc this year as construction wilts. Analysts say "short covering" by funds betting on price falls has played a role. But the jump is largely due to Chinese imports, which reached a record 329,000 tonnes in February, and a further 375,000 tonnes in March. Chinese industrial demand cannot explain this. China has been badly hit by global recession. Its exports - almost half GDP - fell 17pc in March. While Beijing's fiscal stimulus package and credit expansion has helped lift demand, China faces a property downturn of its own. One government adviser warned this week that house prices could fall 50pc. One thing is clear: Beijing suspects that the US Federal Reserve is engineering a covert default on America's debt by printing money. Premier Wen Jiabao issued a blunt warning last month that China was tiring of US bonds. "We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets," he said. This is slightly disingenuous. China has the world's largest reserves - $1.95 trillion, mostly in dollars - because it has been holding down the yuan to boost exports. This mercantilist strategy has reached its limits. The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: it stops the yuan rising, without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis. Beijing may yet buy gold as well, although it has not done so yet. The gold share of reserves has fallen to 1pc, far below the historic norm in Asia. But if a metal-based currency ever emerges to end the reign of fiat paper, it is just as likely to be a "Copper Standard" as a "Gold Standard".

"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said. The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).

While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank.

John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep."

Zhou Xiaochuan, the central bank governor, piqued the interest of metal buffs last month by calling for a world currency modelled on the "Bancor", floated by John Maynard Keynes at Bretton Woods in 1944.

The Bancor was to be anchored on 30 commodities - a broader base than the Gold Standard, which had caused so much grief in the 1930s. Mr Zhou said such a currency would prevent the sort of "credit-based" excess that has brought the global finance to its knees.

If his thoughts reflect Communist Party thinking, it would explain the bizarre moves in commodity markets over recent weeks. Copper prices have surged 49pc this year to $4,925 a tonne despite estimates by the CRU copper group that world demand will fall 15pc to 20pc this year as construction wilts.

Analysts say "short covering" by funds betting on price falls has played a role. But the jump is largely due to Chinese imports, which reached a record 329,000 tonnes in February, and a further 375,000 tonnes in March. Chinese industrial demand cannot explain this. China has been badly hit by global recession. Its exports - almost half GDP - fell 17pc in March.

While Beijing's fiscal stimulus package and credit expansion has helped lift demand, China faces a property downturn of its own. One government adviser warned this week that house prices could fall 50pc.

One thing is clear: Beijing suspects that the US Federal Reserve is engineering a covert default on America's debt by printing money. Premier Wen Jiabao issued a blunt warning last month that China was tiring of US bonds. "We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets," he said.

This is slightly disingenuous. China has the world's largest reserves - $1.95 trillion, mostly in dollars - because it has been holding down the yuan to boost exports. This mercantilist strategy has reached its limits.

The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: it stops the yuan rising, without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis.

Beijing may yet buy gold as well, although it has not done so yet. The gold share of reserves has fallen to 1pc, far below the historic norm in Asia. But if a metal-based currency ever emerges to end the reign of fiat paper, it is just as likely to be a "Copper Standard" as a "Gold Standard".

Think of it this way: China started out with about $1 trillion in cash, most of which was held in dollars. Then it looked at the yield on that cash (almost zero) and then they thought about all the money the Fed was printing, and all the commodities they would be buying in the future, and they figured they had too much exposure to dollars and not enough to commodities. Then they realized that if they tried to sell $1 trillion of dollar cash they could depress the dollar's value and thus undermine their entire holdings of dollar-denominated instruments. So they decided to move some money from dollar cash to copper. That is the equivalent of the world suddenly waking up and finding that its demand for dollar cash had declined, and its demand for exposure to commodities had increased. A relative price shift happens, and most of it shows up in an increased price for copper.

The world cannot get rid of all the dollar cash that exists out there, but any attempt to reduce dollar cash exposure must necessarily result in an increased price for the new object of affection. Money doesn't actually flow from one market to another, but changing desires to hold the money balances that exist do result in changes in relative prices.

If China’s euros, pounds, yen and other non-dollar reserves were managed as a separate portfolio, China’s non-dollar portfolio would be bigger than the total reserves of all countries other than Japan. It would also, in my view, be bigger than the portfolio of the world’s largest sovereign fund. That is just one sign of how large China’s reserves really are.

Roughly a third ($650 billion) of China’s $1954 billion in reported foreign exchange reserves at the end of March aren’t invested in dollar-denominated assets. That means, among other things, that a 5% move in the dollar one way or another can have a big impact on reported dollar value of China’s euros, yen, pound and other currencies. China’s headline reserves fell in January. But the euro also fell in January. After adjusting for changes in the dollar value of China’s non-dollar portfolio, I find that China’s reserve actually increased a bit in January. Indeed, after adjusting for changes in the valuation of China’s existing euros, pounds and yen, I estimate that China’s reserves increased by $40-45b in the first quarter — far more than the $8 billion headline increase.

That though hinges on an assumption that China’s various hidden reserves — the PBoC’s other foreign assets, the CIC’s foreign portfolio, the state banks’ foreign portfolio - didn’t move around too much.*

The foreign assets that are not counted as part of China’s reserves are also quite large by now; they too would, if aggregated, rank among the world’s largest sovereign portfolios. They are roughly equal in size to the funds managed by the world’s largest existing sovereign funds. That is another indication of the enormous size of China’s foreign portfolio.

Clearly, the pace of growth in China’s reserves clearly has slowed. Quite dramatically. Reserve growth — counting all of China’s hidden reserves — has gone from nearly $200 billion a quarter (if not a bit more) to less than $50 billion a quarter. Indeed, reserve growth over the last several months, after adjusting for valuation changes, has been smaller than China’s trade surplus.

But there is some evidence that the pace of the “hot” outflows has started to slow. Indeed, the evidence showing a turn here — assuming the data on the state banks’ doesn’t have any surprises — is better than the evidence showing a turnaround in trade flows.*** The non-deliverable forward market is no longer pricing in a depreciation of China’s currency, and in the past, changes in the NDF market have corresponded reasonable well with hot money flows.

I consequently wouldn’t be totally surprised if the pace of China’s reserve growth started to pick up again over the next couple of quarters. The fall in reserve growth over the past two quarters has corresponded to rise in capital outflows — not with a sustained fall in China’s trade surplus.

But even if reserve growth picks up a bit, China’s government will likely buy fewer US assets than it did in 2008. Some of those assets though were in a sense bought with “borrowed” money — the hot inflow. This adjustment though isn’t a bad thing; we all should want China to buy more of the world’s goods and fewer of the world’s bonds.

For now, though, the available data indicates that China is still buying US assets: in January, China’s US holdings rose by about $20 billion (almost all deposits and short-term Treasuries).**** Keith Bradsher’s lede focused on the headline change in China’s reserves in January and February — the fall in reserves wasn’t adjusted for valuation changes, and thus overstates the actual change in China’s dollar holdings. Yves Smith consequently is a bit more worried than I am. China’s purchases have slowed, but — if the TIC data is accurate — they haven’t stopped.

One last point: As Bradsher notes, China’s trade surplus can help to finance the United States (now reduced) trade deficit even if it doesn’t flow directly into China’s central bank. The hot money leaving China has to go somewhere, and no doubt a large fraction currently flows into US dollar-denominated assets. A decent chunk of the outflows seems to be showing up in Hong Kong’s reserves for example, and the HKMA likely holds a dollar-heavily portfolio.

Sustained hot money outflows pose more problems for China than for the US. They imply a lack of domestic confidence in China’s economic prospects. The risk to the US would come if China’s government decided to suddenly stop buying US assets — or sell its existing assets — at a point in time when private Chinese investors didn’t want to hold US dollars or US assets.

* The main issue here is what happened to the state banks’ dollar reserve requirement; those dollars seem to be held on deposit at the PBoC, where they are counted as part of the PBoC’s balance sheet as “other foreign assets.”** I am also assuming that China doesn’t mark its bond or equity portfolio to market, and thus changes in the market value of China’s existing investments have no material impact on China’s reported reserves.*** A fall in the reserve requirement and the PBoC’s other foreign assets reduces reserve growth, and thus would increase estimated hot money outflows. Adding in FDI outflows (Chinese mining companies expanding abroad) and the Rosneft loan, if it wasn’t financed out of the state banks existing pool of foreign exchange, by contrast, would tend to reduce estimated hot money outflows.**** The fall off in China’s recorded dollar purchases has actually lagged the fall in China’s reserves. This likely reflects a shift in China’s portfolio toward safe dollar assets, but it is striking that China’s recorded US portfolio has increased by more than its reserves recently. That though is a topic for another post.

This entry was posted on Monday, April 13th, 2009 at 9:21 am and is filed under China, Exchange Rate, Sovereign Wealth Funds, central bank reserves. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

22 Responses to “China’s reserves are still growing, but at a slower pace than before”

1. April 13th, 2009 at 9:58 am charlie responds:

I think China’s reserve growth is directly correlated to how much it has to grow to maintain their USD, I mean basket, peg.

The reason their reserve growth has slowed is with a smaller trade surplus, they don’t have to acquire as many USD to maintain their currency peg. 2. April 13th, 2009 at 10:15 am anon1 responds:

bsetser: Sustained hot money outflows pose more problems for China than for the US. They imply a lack of domestic confidence in China’s economic prospects.

No. That’s not what is happening.

If you look closely at what has caused hot money outflows, they have been mostly cases of “pull” versus “push.” What has happened is that Western banks and investors have ended up with huge losses and have been cashing in their China investments and not extending anymore credit.

I haven’t seen a single investor that thinks that China’s investment environment is worse than that of the United States, and the reason that people are withdrawing money is that they fear that the US is going to have big problems in which case they want as much cash as they can get.

Also my sense is that very little of the money that is going out is “domestic”. Lot’s of Western money went into China over the last few years, and it’s that money that is now flowing out.

The other thing is that people going into pawn shops and carrying suitcases of cash makes a nice image, but you just are not going to move $100 billion in suitcases and pawn shops.

All that money is flowing through investment banks in Hong Kong, and I think that one of the ironies of this is that Western banks are going to be hit harder by new Chinese NPL’s than Chinese banks. 4. April 13th, 2009 at 2:03 pm bsetser responds:

Actually, most of the inflows seem to have come from the overseas Chinese community and HK residents, given China’s controls. And most of the outflows todate seem to reflect the reversal of early bets on RMB appreciation rather than a loss of confidence in China. Ergo, they are the mirror image of big inflows in late 07/ early 08. But if the outflows are sustained, that would be something different —

Note as well that I do not expect the outflows to be sustained, ergo i expect more reserve growth going forward than in q4 08 and q1 09. 5. April 13th, 2009 at 2:34 pm Namke von Federlein responds:

@ Twofish - I think that you are one of the few people in the entire world that has earned the right to use the word ‘no’ to start a sentence. However, this gives me an obvious question - losing face is crime number one in China? I love question marks? Get the right question - you have 90% of the answer? Prevent a war, start a peace?

@brad - Perhaps the outflows are just a USD carry-forward unwind? I would appreciate a blog post about the USD issued debt - and whether the carry-forward is unwinding or the Treasury situation is simply creating a bubble catastrophe of epic proportions. If I was running China or a Chinese corporation - I would not issue a single contract or bond in USD. Not one penny. But, hey, I’m a bit eccentric?

@Twofish - Serendipity. Brad does what he can (like all of us - in the limits of his self-policing conceptual framework) but the link from my blog to brad’s blog is called ‘Twofish comments Council’. To be funny : China is not a blob? I still remember the first time I saw an ethic map of China in color. The Art of Peace = My Own Land?

@Brad - the name I was looking for in an old blog post about a letter to the World Bank was Simon Johnson - when he started blogging at the IMF it was wonderful. Mr. Johnson’s strong opinions and fairness got him kicked out? I will ‘pull a Simon’ here and ask - as politely as I can - are you getting intellectually inbred? In my opinion - peace is how statistics offer a perspective on the integrity of an investment climate and the people who report on it?

May all beneficial wishes come true in beneficial ways!

A famous Namke expression : Patience is a virtue until it becomes some sort of weird psychological disease?

May we soon all look back on this credit crisis as nothing more than a way to encourage our children to invest with wisdom! 6. April 13th, 2009 at 5:05 pm DJC. responds:

Brad: And most of the outflows to date seem to reflect the reversal of early bets on RMB appreciation rather than a loss of confidence in China.

DJC: Western Banks are massively divesting of Chinese assets. From Reuters,

” Bank of America (BAC.N) has sold part of its stake in China Construction Bank (0939.HK), while UBS (UBSN.VX) and Royal Bank of Scotland (RBS.L) each sold their entire holdings in Bank of China (3988.HK)(601988.SS). ”

According to Wikipedia, "Influential authors William Strauss and Neil Howe label American Baby Boomers [as people born between the years] 1943 and 1960." This means that in 1980, the youngest boomer was 20, the oldest was 37 and the average was 28.5 (see table below).

Why is this important? Because the boomers are the largest single demographics cohort in history, and they have exerted many well-characterized influences on politics and social structure. I won't go into any of that here, but will instead focus on what I view as the underappreciated economic and financial impacts of the boomer crowd.

The relevant detail here is that a person's income begins at a level of zero, and (on average) rises steadily to a point before declining throughout old age back towards zero. Where is the peak of earnings?

Again from Wikipedia, "Two decades ago, the peak earning years were between 35 and 44. Now they occur ten years later. Twenty years ago, those in their peak earning years took home about twice as much as workers between the ages of 20 and 24. Now they earn more than three times as much."

So peak earnings lie between the ages of 35 to 55 over the period we are discussing (1978 onwards).

This means that in 1980, when stocks and bonds and housing all began their journey into the wild blue yonder, the oldest of the baby boomers were just entering their peak earning years. What might we predict to be the collective impact of a gigantic demographics bolus moving through its peak earning years?

Well, accumulating savings and investing in such things as stocks, bonds, and houses are both highly correlated with earning power. Extrapolating across an entire generational demographic bulge, we might readily defend the idea that rising asset prices were at least partially, if not largely, driven by the rising earning power of the boomers.

Now let's take another look at the 30-year stock chart with the boomers' peak earning years (loosely defined as the time when the middle range of the boomer demographic was between 35 and 50 years old) marked upon it:

Again, this might be a matter of correlation, not causation, but if the rise in stock prices witnessed over the late 1980s, 1990s and early 2000 timeframe was in large part due to a demographic bulge, then we could readily predict that stocks and bonds (and houses and everything else) will not be a sure-fire path to wealth in the future like they were in the past.

However, what goes up must come down. Those who save for retirement must also spend in retirement. So I invite you to consider the idea that our common experience with paper assets might be explained as a demographic dividend, as much as by the inflationary policies of the Federal Reserve or the fact that ample oil reserves were available to supply the economic expansion.

If this thesis holds, then here's what we might predict:

Tailwind of boomer investment turns into headwind of disinvestment

As mentioned in the Crash Course (in Chapter 14 - Assets and Demographics), there seems to be a slight problem in the model where one generation sells off its assets to the generation behind them. When there are more sellers than buyers, prices fall, and when there are more buyers than sellers, prices rise. So I must ask the question, "What will happen when the boomers seek to unload their assets to fund their retirements?" It seems entirely likely that we could see more sellers than buyers for a while. I am anticipating that this will create a sustained headwind that will grind down asset prices until a more proportional relationship to production is struck.

The great illusion created by the demographically-driven rise in asset prices was the notion that one could park excess money in some form of paper or housing asset and "get wealthy" over time. For a while, it seemed so simple. Buy the right index fund and sit back and wait. Just buy a house and wait. Just pick the right stock and wait. That's all it took to ‘get rich.' Right?

But if you stop and think about it, this is really not possible, at least not in aggregate and certainly not over the long haul. It is a cheap, temporary illusion. Real wealth is created by people producing things. Once a company has sold stock through a primary offering, no new capital is "invested" in the company, by virtue of the fact that people are bidding up its stock in the secondary market. So all secondary stock-market purchases are really just bets on the prospects of the company to earn future money, not actual capital investment.

The impact of the failure to save

Real wealth comes from actual production. Somebody, somewhere, has to turn sand into a silicon wafer, and somebody else has to turn that into a semiconductor chip, which somebody else has to turn into a computer. That's creating value. Along the way, it is vital that the property, plant, and equipment of these manufacturers be refurbished and replaced as necessary. Unless we want to fund these investments from a steadily rising mountain of debt that will someday collapse on itself, the borrowings must come from savings.

When I look around, I see nation that has failed both to save and to properly maintain its core capital stock. The bridges in my town are all "D"-rated or lower, many towns still subsist on dial-up Internet access, and practically every public building is due for a retrofit. These are local anecdotes, so take them with a grain of salt, but that's what I see.

On a larger scale, it is certain that consuming more than one produces and failing to save (two sides of the same coin) are a sure path to the poorhouse. Since the late 1970s or early 1980s, the US has been living well beyond its means, consuming more than it produces. We call this "the trade deficit," which is simply the measure of what we export against what we import. Specifically, imports are subtracted from exports, and a negative number means, "You're consuming more than you produce!"

This next chart of the trade deficit is a bit old (it comes from a seminar I gave in 2007), and I certainly should update it, but it would tell the very same story: The US is on an aggressive path to the poorhouse. To fund all that excess consumption, the US made the strategy-poor decision to borrow the difference from foreigners, a decision which will either destroy the dollar at some point in the future or cede a form of economic veto power to our future competitors.

Along with this foreign borrowing came the migration of our actual sources of wealth generation (production) to offshore locations, which, when you think about it, was a necessary condition, because we were not saving enough to fund the required investments here at home anyway.

The bottom line of this story is that debt represents a claim on the future, and future cash flows cannot forever be borrowed. Eventually they must reflect actual production. That is, future wealth generation must be of sufficient size to support future debt servicing costs.

Because the US made the extremely odd conjoined decision to both fund its excess consumption with foreign borrowing and send a large proportion of its wealth generation offshore, a future consisting of a vastly diminished standard of living is about as much of a sure thing as one can find.

Frankly, I do not see any possible way for the debt promises (see the Debt-to-GDP chart) to be kept. I see a future of paper asset destruction that will bring future promises and future production back in line. I don't know all the wrinkles and details, but I am thinking that the next ten years will see the US's debt obligations shrink back to something less than 200% of GDP. Along with that, the portion of our GDP that was false, because it was inflated by excess deficit spending, will be shrinking. I think that $25 to $30 trillion of (current value) debt destruction lies along that path.

The stimulus package, as large as it is, is merely a down payment.

This means that you might need to completely rethink your views on "investing" and how assets behave, along with how you will secure and protect your wealth.

The notion that everyone can "become wealthy" through entirely passive investments in stocks and bonds is a deep-seated cultural belief that is constantly reinforced by a self-interested financial services industry. But we each might benefit by asking ourselves, "Does this makes sense?" And, if it does not, we must then ask, "What might the implications be?" Whatever answers might develop in your mind, I invite you to trust yourself and to research the matter further if you are not entirely comfortable with them.

What next?

My purpose in writing about the true source of material wealth and the impact of baby boomers on stocks, bonds, and housing prices is to prompt you to seriously consider the possibility that the economic activity of the last few decades is misleading.

It is this disconnect between "how things were" and "how things actually work" that led me to make serious changes to my life. It formed the basis for my deeply held belief that the next twenty years are going to be completely unlike the last twenty years.

If you are like me, your beliefs about "how things work" were shaped during an anomalous period which will not soon be replicated in our lifetimes - if ever. It comprised a unique combination of demographics, geopolitical circumstances, a politicized Federal Reserve, supportive energy supplies, and corporatized media better suited to reinforcing consumer beliefs than delivering essential context.

In my estimation, this marks the beginning of a great leveling of expectations between what we promised ourselves and what reality can deliver. We are in the opening stages of a grand play with many acts and even more plot twists.

I intend this piece to give you one more tool in your toolbox that you could use in your discussions with your financial advisor, spouse, friends, or with whomever you regularly discuss our future financial prospects.

The final act in this play, I suspect, will be the destruction of the dollar, along with many other fiat currencies, as stores of wealth. You still have time to begin maneuvering your wealth out of fiat (paper) currencies and into tangible expressions of wealth, but in my experience, most people won't, until and unless their beliefs are in alignment with the necessary actions. For most people, most especially me, sawing at the rope that anchors our beliefs in the past is a slow process, with progress being measured by the breaking of each individual strand.

I certianly agree that the Boomers have and will affect the economy. However our economy is increasing global and there are more young people in the world than old. One of the problems with Economics and all of the other Social Science is that the data is weaker than the Hard Science (physics etc) and it is hard to separate all the different factors out. Models are very simplified forms or reality etc. I don' t think you can predict the future of the Economy with certainly with one data point

I also think one of greatest causes of increased wealth in the US is increased productivity of US workers. (To be fair this is sort of one data point) Increased productivity is usually causes by better technology and I think recent technological advances are just at the beginning stages.

Larry Summers has a nice three minute summary of the history of American productivity from the Big Think.

Look at the birth rates of the nations that can possibly supply us with educated motivated workers. Most are below sustaining levels. The only places still exporting works are islamic third world rat holes. After doing alot fo travelling over the last two years i think i have seen enough to say, we do not need anymore sudanese cab drivers or pakistanni baggage screeners.

"I also think one of greatest causes of increased wealth in the US is increased productivity of US workers. ... Increased productivity is usually causes [caused?] by better technology and I think recent technological advances are just at the beginning stages."

Yes, but technology growth comes from friendly policies toward the gains from capital investment. Productivity growth in simple terms comes from power tools. When the carpenter goes from a hand saw and hammer to a power saw, nailing gun and laser level, productivity increases. You might get shovelers to shovel a little faster with a bonus program but not on a magnitude like you will if they put them at the controls of a diesel powered Bobcat. I had the opportunity to sell microprocessor emulation tools to supercomputer companies, logic analyzers to avionics firms and optical time domain reflectometers to under-the-ocean fiber optic cable operators. Productivity growth is all about capital investment. In the Lawrence Summers video he seems to confirm that with his observation that the highest growth in productivity started in the mid-nineties. That is precisely when Clinton accepted the Gingrich rate cuts in capital gains taxation. You don't increase the productivity or value of labor or the pay for labor by promising to punish the gains from capital investments. The first phase of canceling the gains of the Bush tax cuts began Jan. 1 2008 when the Pelosi congress ended favorable rules on depreciation of capital equipment, along with their promise of serious increases in investment tax rates to follow. Maybe Summers has had some success persuading President Obama of the ill-advised wisdom of punishing returns from investment to help labor but a great deal of damage has already been done - just by promising that future rates will be higher.

Just when you think the political class may have learned something in months of trying to fix the banking system, the ghost of Hank Paulson returns to haunt the Treasury. The latest Beltway blunder -- and it would be a big one -- is the Obama Administration's weekend news leak that it may insist on converting its preferred shares in some of the nation's largest banks into common equity.

The stock market promptly tumbled by more than 3.5% yesterday, with J.P. Morgan falling 10% and financial stocks as a group off 9%, as measured by the NYSE Financials index. Note to White House: Sneaky nationalizations aren't any more popular with investors than the straightforward kind.

The occasion for this latest nationalization trial balloon is the looming result of the Treasury's bank strip-tease -- a.k.a. "stress tests." Treasury is worried, with cause, that some of the largest banks lack the capital to ride out future credit losses. Yet Secretary Timothy Geithner and the White House have concluded that they can't risk asking Congress for more bailout cash.

Voila, they propose a preferred-for-common swap, which can conjure up an extra $100 billion in bank tangible common equity, a core measure of bank capital. Not that this really adds any new capital; it merely shifts the deck chairs on bank balance sheets. Why Treasury thinks anyone would find this reassuring is a mystery. The opposite is the more likely result, since it signals that Treasury no longer believes it can tap more public capital to support the financial system if the losses keep building.

Worse, wholesale equity conversion would mean the government owns a larger share of more banks and is more entangled than ever in their operations. Giving Barney Frank more voting power is more likely to induce panic than restore confidence. Simply look at the reluctance of some banks -- notably J.P. Morgan Chase -- to participate in Mr. Geithner's private-public toxic asset sale plan. The plan is rigged so taxpayers assume nearly all the downside risk, but the banks still don't want to play lest Congress they become even more subject to political whim.

A backdoor nationalization also creates more uncertainty, not less, by offering the specter of an even lengthier period of federal control over the banking system. And it creates the fear of even more intrusive government influence over bank lending and the allocation of capital. These fears have only been enhanced by the refusal of Treasury to let more banks repay their Troubled Asset Relief Program (TARP) money.

As it stands, banks and their owners at least know how much they owe Uncle Sam, and those preferred shares represent a distinct and separate tier of bank capital. Once the government is mixed in with the rest of the equity holders, the value of its investments -- and the cost to the banks of buying out the Treasury -- will fluctuate by the day.

Congress is also still trying to advance a mortgage-cramdown bill that would hammer the value of already distressed mortgage-backed securities, and now the Administration is talking up legislation to curb credit-card fees and interest. Both of these bills would damage bank profits, but large government ownership stakes would leave the banks helpless to oppose them. (See Citigroup, 36% owned by the feds and now a pro-cramdown lobbyist.)

We've come to this pass in part because the Obama Administration is afraid to ask Congress for the money for a meaningful bank recapitalization. And it may need that money now in part because Mr. Paulson's Treasury insisted on buying preferred stock in all the big banks instead of looking at each case on its merits. That decision last fall squandered TARP money on banks that probably didn't need it and left the Administration short of funds for banks that really do.

The sounder strategy -- and the one we've recommended for two years -- is to address systemic financial problems the old-fashioned way: bank by bank, through the Federal Deposit Insurance Corp. and a resolution agency with the capacity to hold troubled assets and work them off over time. If the stress tests reveal that some of our largest institutions are insolvent or nearly so, it's then time to seize the bank, sell off assets and recapitalize the remainder. (Meanwhile, the healthier institutions would get a vote of confidence and could attract new private capital.)

Bondholders would take a haircut and shareholders may well be wiped out. But converting preferred shares to equity does nothing to help bondholders in the long run anyway. And putting the taxpayer first in line for any losses alongside equity holders offers shareholders little other than an immediate dilution of their ownership stake. Treasury's equity conversion proposal increases the political risks for banks while imposing no discipline on shareholders, bondholders or management at failed or failing institutions.

The proposal would also be one more example of how Treasury isn't keeping its word. When he forced banks to accept public capital whether they needed it or not, Mr. Paulson said the deal was temporary and the terms wouldn't be onerous. To renege on those promises now will only make a bank recovery longer and more difficult.

The internet certainly has the ability (it may not) to raise education levels are over the world. Educated woman have on average lower birth rates but that is a father off problem. There are currently educated motivated people from over the world who would like to immigrate to US and could replace boomers in the work force. My company is currently off-shoring technical jobs to Latin America. I am not saying it is certain the our economy will improve but there is much more evidence for hope than despair.

"Ever since it became clear that three of the four jihadis who bombed London on July 7 were born and bred in England, the British have been taking a hard look at their Muslim neighbors: Do they share the same values? How do they fare economically? Whom do they cheer when England plays Pakistan at cricket? And how many more would-be bombers are among them?

As it happens, Her Majesty's government was well clued on these questions before the bombers struck: A 2004 Home Office study showed, for example, that British Muslims are three times likelier to be unemployed than the wider population, that their rates of civic participation are low, and that as many as 26% do not feel loyal to Britain. By contrast, the U.S. Census Bureau is forbidden by law from keeping figures on religious identification (although it collects voluminous information on race and ethnicity), so there are no authoritative data on the size and nature of America's Muslim population. Yet if the U.S. is ever attacked by American jihadis, we will no doubt ask the same questions about our Muslim community that Britons are now asking about theirs.

Here is what we know.

First, let's dispose of the common misconception that Arab-Americans and Muslim Americans are one and the same. In fact, most Arab-Americans aren't Muslim, and most Muslim Americans aren't Arab. According to the 2000 census, there are 1.2 million Americans of Arab descent, of whom only 24% (according to a survey by the Arab American Institute) are Muslim. As for the rest, they are mainly Catholic, Eastern Orthodox or Protestant. They are also highly successful, with an above-average median household income of $52,000 and an astonishing intermarriage rate of over 75%, suggesting they are well on their way toward blending into the great American melting pot.

Information on American Muslims is sketchier. Thanks to a 2004 Zogby International survey, we know that a plurality of Muslim Americans--about one-third--are of South Asian descent; 26% are Arab and another 20% are American blacks. But until 2001 we had no idea how many Muslims lived in America, and even now the figure remains a matter of intense controversy. All major Muslim advocacy groups put the number at above six million, which, as Daniel Pipes of the Middle East Forum observes, has the convenience of being higher than the American Jewish population. Yet all independent surveys put the real figure at no more than three million, while the most credible study to date, by Tom Smith of the University of Chicago's National Opinion Research Center, estimates total Muslim population at 1,886,000. "[It] is hard to accept that Muslims are greater than one percent of the population," he writes.

Whatever the real figure, what's reasonably clear is that Muslim Americans, like Arab-Americans, have fared well in the U.S. The Zogby survey found that 59% of American Muslims have at least an undergraduate education, making them the most highly educated group in America. Muslim Americans are also the richest Muslim community in the world, with four in five earning more than $25,000 a year and one in three more than $75,000. They tend to be employed in professional fields, and most own stock, either personally or through 401(k) or pension plans. In terms of civic participation, 82% are registered to vote, half of them as Democrats. Interestingly, however, the survey found that 65% of Muslim Americans favor lowering the income tax.

In these respects, Muslim Americans differ from Muslim communities in Britain and Continental Europe, which tend to be poor and socially marginalized. Four other features set American Muslims apart.

First, unlike in Europe the overwhelming majority of Muslims arrived here legally, and many of those who didn't were deported after Sept. 11, 2001. Currently, according to Ali Al-Ahmed of the Washington-based Saudi Institute, there are probably no more than a few thousand Muslim illegal immigrants in the U.S.

Second, 21% of Muslim Americans intermarry, according to the 2001 Religious Identification Survey of the City University of New York--close to the national rate of 22% of Americans who marry outside their religion. And because 64% of Muslim Americans are foreign born, there is reason to expect that figure to grow among second and third generations.

Third, according to Ishan Bagby, a professor at the University of Kentucky who recently made a study of mosque attendance in Detroit, the average mosque-goer is 34 years old, married with children, has at least a bachelor's degree, and earns about $74,000 a year. If this is representative of Muslim Americans as a whole, it suggests that the religiously committed among them hardly fit the profile of the alienated, angry young Muslim men so common today in Europe.

Finally, Muslim Americans benefit from leaders who, despite some notable exceptions, are generally more responsible than Muslim leaders in Britain and Europe. Just compare the forthright condemnations of terrorism by the Los Angeles-based Muslim Public Affairs Council to the cunningly ambiguous utterances of France's Tariq Ramadan, to say nothing of the openly jihadist positions of some of Britain's most notorious imams.

So does the U.S. have a "Muslim problem"? If the data above are accurate, they strongly suggest we do not; on the contrary, America's Muslims tend to be role models both as Americans and as Muslims. But that does not mean there aren't any problems. One comes in the form of U.S. mosques funded by Saudi Arabia, which can serve as a conduit for the kingdom's extreme Wahhabist brand of Islam. Mr. Al-Ahmed calls these mosques "an incubator for suicide bombings and terrorism." Another is that, while most American Muslims have successfully integrated into American life, there remain culturally isolated and impoverished enclaves of Muslim immigrants. It was in just such an enclave in Jersey City, N.J., that the disciples of Sheikh Omar Abdel Rahman planned the 1993 World Trade Center bombings. Similarly, in Lodi, Calif., where two Pakistani men have been charged with attending terrorist training camps, some 80% of the Pakistani community does not speak adequate English.

Hanging over all this is the question of the long-term trajectory of the American Muslim population. In Britain, as in Germany and France, a striking feature of the Islamist movement is that it has taken root among second-generation Muslims, whose disenchantment with their Western lives is matched by the romanticist appeals of ethnic authenticity and religious purity. America's mostly foreign-born Muslims are perhaps less susceptible to this. But that's no guarantee their children won't be seduced. Then, too, neither a first-rate Western education nor economic affluence offers any inoculation against extremism: Just look at the careers of 9/11 ringleader Mohamed Atta, educated at the Technical University of Hamburg, or Daniel Pearl killer Ahmed Omar Saeed Sheikh, who did undergraduate work at the London School of Economics.

It takes no more than a few men (or women) to carry out a terrorist atrocity, and there can be no guarantee the U.S. is immune from homegrown Islamist terror. But if it can be said that "it takes a village" to make a terrorist, the U.S. enjoys a measure of safety that our European allies do not. It is a blessing we will continue to enjoy as long as we remain an upwardly mobile, assimilating--and watchful--society."